Figuring safety stock into your sales forecast is not doing you any favors.
Wait, what?
Safety stock is a foundational concept in the world of inventory management. Yes, that’s true.
Let’s take a step back.
What is the purpose of setting safety stock?
Suppliers screw up. They sent the wrong products, or worse yet don’t send them at all. Been there and done that. The need for a buffer to allow for the real world of eCommerce stock management is real.
Setting safety stock is not the best way to build in a buffer for your inventory needs. There is a smarter way to build in some padding to your stock on hand, to allow for these real life complications that come up.
First let’s look at what doesn’t work about safety stock.
Safety stock is static. That means it does not grow as your store grows.
For example, 5 units might be a meaningful number now. Over time as your store grows, 5 units could become a meaningless amount to use as a buffer. You need to manage a stock buffer that grows with your store.
If safety stock doesn’t meet your needs, how can you build in a buffer?
Days of stock.
What Are ‘Days of Stock’ and How Do They Benefit Inventory Planning?
Days of stock are the number of days that your current inventory will cover considering customer demand for those products.
Let’s look at an example. If your sales velocity is 2 units per day and you have 50 units on hand, the days of stock is 25 days.
When calculating your sales forecast, one important consideration is how many days of stock is ideal for you to keep on hand? Remember that the sales forecast is an estimate.
If you keep enough product to cover 7 days of stock, then you don’t have much additional inventory on hand in case an enthusiastic customer wants to make a large purchase.
How much inventory will allow you to meet customer demand without being overstocked and having too much cash tied up in inventory sitting on your warehouse shelves? A typical place to start is 30 days of stock. For a product that is selling well, this should be more than enough time for you to recuperate your investment and spend your profit on more of that product or another area of growing your business.
How ‘Days of Stock’ Can Act as a Buffer for Supply Chain Disruptions
A smart sales forecast is calculated using the sales velocity and the sales trends in recent months. (We’ll exclude seasonal products from the discussion for now.) Sales velocity is the rate of sales excluding out of stock days.
Once you have your forecasted sales and determined your desired days of stock to have on hand, then you can think about how to build in a buffer to account for supply chain problems. A dynamic way to handle this buffer is to add to your days of stock.
If you start with 30 days of stock, you could increase that to 35 days so that you have additional stock on hand in case of supplier mis-shipments. The additional five days of stock will be based on your sales velocity and will meet the level of customer demand for your products.
Why ‘Days of Stock’ Is a Better Method Than Safety Stock for Inventory Forecastin
If you’re using safety stock as a buffer, then you’re creating extra work for yourself maintaining a solution that doesn’t match customer demand. Ask yourself how you’re determining your safety stock level. Is it based on customer demand? If so, when was that demand? Are you changing and updating your safety stock level every time you see a change in customer demand? How often does customer demand change…weekly or monthly? Are you updating safety stock to meet that changing demand on a weekly or monthly basis? If so, you’re working too hard.
Why ‘Days of Stock’ Is a Better Method Than Safety Stock for Inventory Forecasting
Using days of stock, your inventory buffer is updated dynamically to match changes in customer demand. If you’re selling 2 units per day in January then later selling 5 units per day in September, the number of units to cover 30 days of stock goes from 60 units to 150 units. When you add 5 days of stock as a buffer, then you’ll stock another 25 units. If you had set the safety stock in January at 10 units, then by September that is only a 2 day buffer. It won’t grow as customer demand grows. Using additional days of stock will steadily increase the units needed to cover another 5 days.
You’re doing a lot to grow your business: driving traffic, optimizing conversion on site, merchandising to meet your customers’ needs. Done right, these activities are increasing sales for your store. Make sure you’re building in operations that are growing with your business. Use a smart sales forecast based on sales velocity and use days of stock to have the right amount of stock on hand. Building in a buffer for your inventory needs is smart risk management. Don’t blow it by creating more work for yourself or miscalculating how much buffer to build into your stock levels.
The Advantage of Days of Stock Over Safety Stock
While safety stock has long been a standard practice in inventory management, it often fails to provide the flexibility required in today’s dynamic market. The static nature of safety stock makes it less responsive to fluctuations in demand, which can lead to either overstocking or stockouts. In contrast, Days of Stock is a more adaptive metric, allowing businesses to forecast and manage inventory based on real-time sales data. This dynamic approach ensures that companies can more accurately align their inventory with actual demand, preventing the inefficiencies that come with excess or insufficient stock.
Using Days of Stock, companies can create more efficient and responsive supply chains. It allows businesses to maintain a lean inventory, minimizing storage costs while ensuring that products are available when needed. With its ability to act as a buffer against supply chain disruptions, Days of Stock provides a more reliable and cost-effective solution for managing inventory levels, especially in unpredictable environments. Adopting Days of Stock over Safety Stock leads to improved inventory forecasting, reduced costs, and a more streamlined operation, making it the optimal choice for modern businesses.
FAQs
- What is meant by safety stock?
Safety stock is extra inventory kept on hand to prevent stockouts during unexpected demand fluctuations or supply delays. It acts as a buffer to ensure businesses can continue fulfilling customer orders without disruption. - How do you calculate a safety stock?
Safety stock can be calculated by multiplying the standard deviation of demand during lead time by a safety factor. A typical formula is: Safety Stock = Z * σ * √L, where Z is the safety factor, σ is the standard deviation of demand, and L is the lead time.
- What is the 50% rule for safety stock?
The 50% rule for safety stock is a simple guideline that suggests keeping safety stock at 50% of the average lead-time demand. This rule is used to provide a basic buffer without overstocking.
- What is a good safety stock?
A good safety stock level balances the risk of stockouts with the cost of overstocking based on factors like lead time variability and demand fluctuations. It should be tailored to the business’s specific needs, considering factors such as product type and supply chain reliability.