What is safety stock and how to calculate it?

Safety stock is the buffer that helps manufacturers keep serving their customers when disruptions occur. Having a mathematically defined safety stock and reorder point can help keep promises to customers during issues in your supply chain.

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1. WHAT IS SAFETY STOCK AND
HOW TO CALCULATE IT?

2. Safety stock is the buffer that helps manufacturers keep serving their customers
when disruptions occur.

3. Safety stock is the level of extra inventory that is kept to reduce the risk of stock-outs
caused by shifting supply, demand, or both.
Companies that make to order can continue delivering their products within the promised
lead time by using the safety stock of materials when suppliers are unable to deliver within
their usual timeframes.
Companies that make to stock can continue delivering products from safety stock when
sales are greater than expected, or when production is down, and they can continue
production when suppliers are unable to deliver materials within their usual timeframes.
Having a mathematically defined safety stock and reorder point can help keep promises to
customers during issues that could cause disruptions in your supply chain.
What Is Safety Stock?

5. It is essential to maintain a feasible amount of safety stock. Here are ways how you should
and should not approach it.
DO:
•Use safety stock to mitigate risks of demand and lead time uncertainties.
•Use it together with a reorder point.
•Find a balance between service level, customer availability rate, and carrying costs.
•Use mathematical formulas to define optimal safety stocks for your materials.
The Dos and Don’ts of Safety Stock

6. DON’T:
Use safety stock to mask issues in inventory management, forecasting, production, logistics,
or supplier unreliability.
Keep insufficient safety stock –you will risk being unable to fulfill orders, which could result
in lost sales and customer turnover.
Keep too much buffer –you will most probably keep customers happy, but a higher level of
safety stock immediately means higher inventory costs, extra cash stuck as inventory, and in
time, spoiled, expired, or damaged goods.

7. There are many different waysto calculate safety stock, but we will go over six of them,
starting from the simplest.
Two Simple Formulas
For both of thesesimple formulas, you’ll need to know the:
•Average lead time in days (LTavg)
Your vendor’s average lead time is the average time it takes from purchase order to arrival.
You can pull that data from the Procurement -> Vendors -> A vendor’s reports ->
Purchase Terms reportsection of your MRP system.
How to Calculate Safety Stock?

8. Average demand per day (Davg)
To get your average demand, just pull the statistics Procurement -> Statistics section of
your MRP system.
In this example, we have used 100 pieces of tabletops in a quarter, that is, on average, 66
working days. So we’ll divide the number of items sold by the number of days to get the
average demand per day.
100/66=1.5
The average demand for tabletops is 1.5 per business day.

9. The Basic Formula
This is the easiest and most inaccurate method (other than just improvising) to determine
safety stock.
To use it, you will have to predetermine the number of safety days you’re going to need to
be able to respond to a spike in demand or inconsistencies in supply.
Let’s say you use 1.5 units of tabletops per day and your vendor’s average lead time is 5
business days.

10. Based on previous experience, you set the safety net at 10 days.
This means the safety stock for the tabletop should be 1.5 x 10 = 15 units.
WARNING: This method is not the most accurate due to the necessary safety days being
derived from experience, not from rigid data analysis.

11. The Average –Maximum Formula
To calculate safety stock with it, you need to know your maximum lead times as well as your
maximum demand.
You can determine your maximum lead time by looking at your Procurement -> Purchase
orders section in your MRP system.
Tick the box for “Delay” from the “Choose columns” drop-down menu.

12. Then add the average lead time to the largest delay of the material you are trying to
calculate safety stock for.
Now you have the material’s maximum lead time.
You can find the maximum demand much in the same way.
Just take the month-by-month data from your Procurement -> Statistics section.

13. Let’ say you use 100 units per month on average, but your maximum monthly use this year
has been 130.
And your average lead time is 5 days, but the maximum has been 6.
Convert the monthly demand to demand per business day.
There are 22 business days each month on average, so the average demand is 65/22=2.95
units/day, and the maximum is 130/22=5.91 units/day.
That means your Safety Stock should be (6 x 5.91) –(5 x 2.95) = 35.46-14.75=20.71
Let us round it up and that makes your optimal safety stock 21 units.

14. Here is where we will start applying some proper math.
Apart from your material’s average lead time and average demand, for the following
formulas, you will have to know its:
•Standard service level score (Z)
The standard service score represents the ratio between the material’s holding costs and the
loss of revenue caused by a stock-out. As these numbers vary by business as well as by
product, there is no specific way to determine it. Try to look at your historical data to figure
out the lowest percentage of timely deliveries a customer (or your manufacturing
department) generally accepts before you lose them. Then use the following table to get
the Z value.
Formulas for specific variables

16. •Lead time standard deviation (σLT)
You can find the standard deviation in lead times by looking at your average lead time and
your actual lead times. Get your actual lead times by comparing the Expected Dates with the
Arrival Dates and adding the difference to the average lead time of the vendor.
Here’s an example:

17. Taking the average of the deviations, we’ll find that the lead time standard deviation is 2
days.
•Demand standard deviation (σD)
Demand standard deviation can be calculated by using the example from lead time
standard deviation –just replace the Actual Lead Times with Actual Demand per day, and
the Average Lead Time with Average Demand per day. Just see the day-to-day “Materials
used in shipped goods” statistics to find the Actual Demand.

18. Always remember to use the same units of time measurement throughout your
equations, e.g. only days or only months, otherwise your results will be unusable.

19. Formula for inconsistent lead times
If your lead times are like clockwork but demand fluctuates, use this formula to calculate
your safety stock.

20. Formula for inconsistent demand
If your lead times are like clockwork but demand fluctuates, use this formula to calculate
your safety stock.

21. Formula for independently variable demand and lead times
If both your sales and lead times vary independently of each other, you can use this formula
for safety stock calculation.

22. Formula for dependently variable demand and lead times
In case your demand and lead times fluctuate while being dependent on each other, use
this formula.
Source of formulas: Crack the Code, P. King, APICS Magazine (2011)

23. Having a safety stock could prove to be a lifeline in uncertain times, but it is always
necessary to rely on numbers and analysis when you set your buffers.
Conclusion

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