Safety stock is one of the important things that must be done in warehouses, which helps mitigate the risks resulting from running out of stock for a particular company, so until production does not stop, the Purchasing Department knows the amount of the factory’s daily needs of raw materials used in production, then measures the amount of time needed between The point of ordering the materials from the supplier and the point of arrival of these materials to the factory stores, and accordingly you determine the safety stock, and in this article we will show you everything you want to know about safety stock and how to calculate it.
What is meant by safety stock?
It is the stock that the company needs in order to mitigate the risks that may fall into it as a result of its depleted stock from warehouses, and in general, there are two types of inventory, namely:
- Core inventory, which is the stock of products that remain throughout the year.
- Seasonal inventory, which is the stock of products that remain for a specific period of time.
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How do I calculate safety stock?
There are two methods of calculating safety stocks:
The first method | Calculate security stocks using the basic formula
The basic formula for a safety stock is:
- Safety Inventory = {Maximum Daily Sales * Maximum Lead Time in Days} – {Average Daily Sales * Average Lead Time in Days}.
The second method | Calculate safety stocks using standard deviation
Although calculating safety stocks using standard deviation is the most complex method, in view of its complexity it is the most accurate and takes the following formula:
- Safety Stock = Level of Service Required * Standard Deviation of Lead Time * Average Request
*Note that:
- The required level of service is the likelihood that the company has sufficient available stock to satisfy the current customer, which you can obtain by balancing inventory costs against the cost of inventory.
- Standard deviation of lead time means the differences that may result in the agreed lead time and the delivery time itself.
- Average order, which means the average quantity of products that customers have purchased during a given period of time.
What is reorder point?
Reorder point is one of the important metrics that help in determining delivery lead time, delivery options and it is closely related to security stock, as it indicates when the time is appropriate to place a new order for stock restocking.
In addition to determining the minimum order and displaying the quantities, this helps companies avoid the process of running out of stock, which saves them from many exorbitant costs, and thus the re-order point helps in:
- Provide temporary time for restocking goods.
- Reducing rush fees owed to suppliers.
- Reducing operational clutter.
- Use warehouse space more efficiently.
How do I calculate the reorder point formula?
The reorder point means the level of stock at which you will rearrange in order to be able to meet the demand and improve the control of the inventory, and you can calculate it by using this formula:
- Reorder Point = Timeout Order + Safety Stock
*Note that:
- Timeout Order = Lead Time * Average Daily Sales
- Lead time = the sum of the number of days from the date of the order until the date of receiving the goods in the warehouse
Inventory Management Software for Safety Stock
There is specialized software in stock management for safe inventory, which is one of the methods of automating the inventory management process, which helps reduce the potential for accumulation of raw materials and thus increase storage costs, and it also works to control orders, raw materials, etc. to meet the demand of your customers.
And sometimes it happens that your inventory runs out, which may be due to a defect in coordination between suppliers, manufacturers, customers, as well as sales representatives.
Inventory management software helps you track your inventory, check the availability of sufficient stock to meet customer demands, and it also works to know the amount of safety stock required.
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