The appropriate level of safety stock is typically determined by the replenishment lead time. Safety stock levels are usually expressed as a percentage of the replenishment lead time, with the goal being to ensure that customer demand can be met even when there are delays in the supply chain.
Wondering what the appropriate level of safety stock is for your company? It’s usually determined by the replenishment lead time. Keep reading to learn more about safety stock levels and how to strike the right balance between the cost of inventory and the cost of lost sales.
What is Safety Stock?
Safety stock is the extra inventory that a company keeps on hand to cover customer demand in the event of delays in the supply chain. The goal of safety stock is to ensure that the company can continue operations even if there are delays in the supply chain.
How is Safety Stock Level Determined?
Safety stock levels are usually expressed as a percentage of the replenishment lead time. The replenishment lead time is the time it takes for the company to receive new inventory from the supplier.
For example, if the replenishment lead time is four weeks, a safety stock level of 20% would mean that the company would maintain enough inventory to cover customer demand for five days. This would allow the company to continue operations even if there were delays in the supply chain.
The decision of how much safety stock to maintain is a balance between the cost of holding inventory and the cost of lost sales due to stockouts. In general, the longer the replenishment lead time, the higher the safety stock level should be. This is because the longer the lead time, the greater the risk of delays in the supply chain.
If you are unsure of what safety stock levels to maintain, a good rule of thumb is to start with a safety stock level of 10-20% of the replenishment lead time. This will strike a good balance between the cost of holding inventory and the cost of lost sales due to stockouts. You can always adjust the safety stock level up or down based on your specific needs.
Conclusion
Conclusion paragraph: Are you looking for a way to reduce the amount of inventory you need to maintain while still being able to meet customer demand? If so, consider using an inventory forecasting system. An inventory forecasting system can help you determine the right level of safety stock for your company and streamline the replenishment process. Contact us today to learn more about how we can help you get started.
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