What Is Safety Stock?
Safety stock is extra inventory held as a buffer against demand spikes and supply delays. Here's how to calculate the right amount.
Key Takeaways
- Safety stock is extra inventory held above the reorder point to buffer against uncertainty.
- Higher demand variability or lead time variability requires higher safety stock.
- Too much safety stock ties up cash; too little causes stockouts.
What safety stock is
Safety stock — also called buffer stock — is inventory held in addition to the quantity calculated to cover average demand during average lead time. It absorbs two types of uncertainty: demand variability (selling faster than expected) and supply variability (stock arriving later than expected). Without safety stock, any deviation from average conditions results in a stockout.
A simple calculation
Simple safety stock = Average Lead Time × (Maximum Daily Sales - Average Daily Sales). If your average lead time is 30 days, average daily sales are 20 units, and maximum daily sales are 30 units, safety stock = 30 × (30 - 20) = 300 units. More sophisticated formulas incorporate statistical variability in both demand and lead time for a more precise answer.
The cost of safety stock
Safety stock is working capital sitting on a shelf. For a product costing £10 per unit, 300 units of safety stock represents £3,000 of tied-up cash. Multiply across a large product range and this can be significant. The right level of safety stock balances the cost of holding it against the cost of the stockouts it prevents — including all the hidden costs outlined in the stockout article.
Dynamic safety stock
Static safety stock levels quickly become wrong as sales velocity or lead times change. Review safety stock calculations quarterly at minimum — more frequently for fast-moving lines or volatile supply chains. AskBiz recalculates recommended safety stock levels automatically based on your most recent sales data and lead time history.