Safety Stock
Safety stock is extra inventory kept on hand to reduce the risk of a stockout caused by supply and demand volatility.
Safety stock is a buffer quantity of an item held in inventory. It protects against unexpected events. These events include sudden increases in customer demand or delays in supplier deliveries.
This inventory is separate from cycle stock, which is the inventory used to meet normal demand between orders. Safety stock is only used when forecasts are inaccurate or lead times are longer than planned. For example, a metal fabrication shop might keep extra sheets of a specific gauge of steel. This ensures they can start a new job immediately even if their regular steel delivery is delayed by a week.
Maintaining safety stock helps ensure production continuity. It prevents line stoppages due to material shortages. This leads to better on-time delivery performance and higher customer satisfaction. The cost of holding this extra inventory must be balanced against the high costs of a stockout. Stockout costs include lost sales, idle machine time, and expedited freight charges.
Manufacturers calculate safety stock levels using historical data for demand and lead times. The calculation often considers the desired service level, which is the probability of not having a stockout. These levels are set for each raw material, component, or finished good. They are managed within an inventory management system or ERP to trigger reorders automatically.
A medical device manufacturer uses 100 units of a specific plastic resin per day on average, but usage can spike to 150 units. The supplier's lead time is normally 10 days but has been as long as 15 days. Their safety stock calculation is (150 units × 15 days) - (100 units × 10 days), which equals 1,250 units of safety stock.
How is safety stock different from cycle stock?
Cycle stock is the inventory needed to meet average demand between replenishment orders. Safety stock is the extra inventory held to buffer against unexpected variations in demand or supply.
What is the main cost associated with safety stock?
The primary cost is the carrying cost. This includes expenses for storage, insurance, potential obsolescence, and the capital tied up in the inventory.
Does Just-in-Time (JIT) manufacturing use safety stock?
In pure theory, JIT aims to eliminate all inventory, including safety stock. In practice, many facilities that use JIT principles maintain small amounts of safety stock to guard against unavoidable supply chain disruptions.
How often should safety stock levels be reviewed?
Safety stock levels should be reviewed regularly, such as quarterly or monthly. Recalculation is necessary when there are significant changes in customer demand, supplier lead times, or forecast accuracy.
What is a service level in the context of safety stock?
Service level is a performance target that represents the probability of not having a stockout. A higher desired service level (e.g., 99%) requires a larger amount of safety stock.
Reorder Point
ROPThe reorder point is the inventory level that triggers a new order to replenish a specific item.
Stockout
A stockout is a situation where the inventory for a requested item is completely depleted.
Lead Time
Lead time is the total time elapsed from when a customer places an order to when they receive the finished product.
Just-In-Time
JITJust-In-Time is a production strategy where items are created or delivered only as they are needed, minimizing inventory.
Economic Order Quantity
EOQEconomic Order Quantity (EOQ) is the ideal order size a company should purchase to minimize its total inventory costs, including holding and ordering costs.