What Is Safety Stock?

Inventory management is one of the biggest challenges facing today’s small-business owners. From ever-changing consumer demands to supplier delays and outages, there are countless factors that can make it difficult to determine reorder points and standard deviation of demand.

Fortunately, safety stock can help mitigate these inventory management challenges, as well as prevent stockouts. Check out our guide to learn more about the benefits (and a few risks) of safety stock, as well as how to calculate safety stock levels for your small business.

Safety stock is extra inventory purchased to help avoid stockouts (running out of stock). This additional stock is used as a buffer to mitigate risks like supplier delays, sudden increase in consumer demand, or inaccurate inventory forecasting.

Small-business owners might choose to have safety stock on hand for a variety of reasons. In any case, safety stock is meant to combat uncertainty related to demand, lead times, and forecasting.

Here are a few of the many benefits of safety stock:

Stockouts have a host of negative implications for small-business owners, leading to a loss of sales, decreased customer satisfaction, increased operational costs, and more. Having safety stock can help business owners avoid running out of stock even when unexpected events occur.

Consumer demand can rise and fall depending on the season, current events, and shopping trends. And while it can be difficult for small-business owners to predict consumer demand, safety stock can give companies extra time to replenish stock when demand spikes.

Supplier disruptions might occur because of material shortages, natural disasters, operational issues, and many other reasons. These disruptions can have a negative impact on small-business owners seeking to restock products—but safety stock can help minimize these effects.

In today’s highly competitive business environment, it’s essential for small-business owners to prioritize customer satisfaction. Having safety stock on hand helps to ensure happy, loyal customers who are confident they can always turn to their favorite brands to find what they’re looking for.

Safety stock makes it easier to operate a small business smoothly and efficiently. Customers can purchase the products they love, suppliers aren’t rushed, and employees aren’t overworked. Safety stock can also decrease the expenses related to rush shipping, urgent reorders, and forecast inaccuracies.

Despite the many benefits of safety stock, this inventory management strategy comes with a few challenges small-business owners should be aware of too.

Here are a few concerns business owners should consider before ordering safety stock:

• Excess safety stock. If a company orders too much safety stock, it could end up as obsolete stock that is difficult to get rid of.
• Limited cash flow. Investing in safety stock requires cash—meaning small-business owners may not have as much money to put toward new products of cycle stock.
• Increased storage costs. There’s no way around it: Keeping stock on hand costs money. Business owners will need to consider the cost of storage and warehouse staffing before purchasing safety stock.

Determining the right amount of safety stock is certainly an art form. Small-business owners can gauge the optimal amount of safety stock over time, depending on current consumer demand, lead times, and other factors.

Here is a baseline formula for calculating an average amount of safety stock, but just remember that it’s not a one-size-fits-all equation.

Safety stock = (max. number of units sold in a day ✖ max. lead time in days) − (average number of units sold in a day ✖ average lead time in days)

Safety stock gives small-business owners peace of mind, even when they are faced with challenges like sudden changes in consumer demand or supplier delays. When carefully calculated, safety stock is one of the most effective ways to avoid stockouts and keep customers satisfied. However, it’s important for business owners to consider the challenges and risks associated with safety stock before ordering extra inventory.

Would you like to learn more about safety stock and other types of small-business inventory? Check out Business.org for The Ultimate Guide to Small-Business Inventory Management.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.