Safety stock

Safety stock is designed to protect the company against unexpected changes in demand for the products or delays of delivery. This stock is prepared to preserve the ability of entrepreneurs to satisfy the demand for goods while waiting for next delivery. Safety stock increases the existing stocks in the company calculated on the basis of forecasts or average demand and average delivery time.

• s - point of order
• m - stock level based on demand
• B - safety stock

$s=m+B$

The values refer to the period (t) between filing and delivery of the order. Safety stock value (B) is derived from the efforts of entrepreneurs of preventing lack of goods and is dependent on the level of service that indicates the likelihood that orders placed by customers at time (t) shall not exceed the level of s.

The main reason for the increase of safety stock are:

• increase in the cost of lack of supply.
• increase in uncertainty about the level of demand.
• increase in the risk of delays.

The main arguments for the safety stock reduction are: high cost of stock maintenance, stable demand, good suppliers (very high punctuality of deliveries, good communication).

Time/Stock purchase policy

Time/Stock purchase policy (T, S Policy) - is a component of delivery planning. T - means the time unit, and S is a rational upper stock level. In the management plans of demand needs to be aligned with the plans of deliveries. Main objective in coordination is to prevent a lack of raw material. On the other hand, there can be too much of raw material.

The basic intention of the policy is determination of a pattern, which will be the basis for determining the parameters of the contract. Basically, two elements should be determined:

• size of orders
• time whet they should be submitted

The required parameters are mutually dependent. It must be noted that as a basis for planning managers need to take:

• The size of the order, and then the terms of storage are of secondary importance
• Deadlines for ordering, and adjusted size of orders

Assuming that in the planning manager will be guided by the terms of contracts, key parameter is time, which should be enough for delivery. The standard approach will therefore have considered supplies which will be result of orders placed at an interval of T units of time. Over time, however, T must be linked to a quantitative parameter, which is the size of the order and thus delivery that can satisfy demand for a given period.

It is understood that this role may be fulfilled by: rational upper level of the store (S), its value is based on the physical storage capacity. But determining the level of S for raw materials, managers also have to take into account that in the same store, we must also keep other raw materials.

See also:

• Purchase strategy
• Purchasing in the case of discontinuities in needs‎

Examples of Safety stock

• In retail, safety stock is often used to protect against sudden spikes in demand. For example, a clothing store may prepare for the winter season by stocking up on sweaters and coats in anticipation of colder weather.
• In manufacturing, safety stock is used to protect against supply chain disruptions. For example, if one of the parts needed to build a product is delayed in delivery, the company would need to have a sufficient amount of safety stock to continue production.
• In healthcare, safety stock is used to ensure that there is always enough medication and medical supplies on hand to meet patient demand. For example, a hospital may keep a certain amount of safety stock of antibiotics and painkillers to ensure that they always have enough on hand in case of an emergency.

Advantages of Safety stock

Safety stock is a key component of inventory management that provides a cushion of extra stock to protect against unexpected changes in demand or delays in delivery. The main advantages of safety stock include:

• Having safety stock on hand ensures that there is always a reserve of inventory to fulfill customer orders, even when there are unexpected spikes in demand. This helps to keep customer satisfaction high and avoid potential losses in sales due to stock-outs.
• Safety stock can help to prevent stock-outs during seasonal demand fluctuations. It can also help to reduce the risk of losses due to expired inventory or damaged goods.
• Having a safety stock in place can help to reduce lead times and make it easier to meet customer expectations.
• Having safety stock also helps to reduce the costs associated with ordering large quantities of inventory, as the company will not need to over-order to ensure it is able to meet customer demand.

Limitations of Safety stock

Safety stock is an important part of managing the supply chain and ensuring adequate inventory levels, but there are some limitations associated with it. These include:

• Cost - Maintaining safety stock requires additional costs which may not be feasible in all cases.
• Space - Having too much safety stock can take up valuable storage space which could be used for storing other items or used for other purposes.
• Accuracy - The amount of safety stock needs to be calculated accurately in order for it to be effective. If it is not calculated properly, there may not be enough or too much safety stock, resulting in stock-outs or too much inventory.
• Lead time - The lead time for ordering more inventory and the delivery of the inventory needs to be taken into consideration when calculating safety stock in order to ensure that the safety stock is sufficient.

Other approaches related to Safety stock

In addition to using safety stock, there are several other approaches that can be used to protect against unexpected changes in demand or delays of delivery. These include:

• Implementing a buffer inventory system: This system allows companies to store a minimum amount of inventory that is used to cover any unexpected changes in demand or delivery delays.
• Setting up a Just-in-Time (JIT) inventory system: This system allows companies to reduce their inventory levels by only ordering what is required for immediate use, thereby reducing the need for an emergency stock.
• Utilizing vendor-managed inventory (VMI): This system involves suppliers managing inventory for the company, allowing them to better anticipate demand and maintain an appropriate amount of stock.
• Implementing vendor-managed replenishment (VMR): This system allows suppliers to automatically replenish inventory once it reaches a predefined level.

In conclusion, while safety stock can be used as a way to protect against unexpected changes in demand or delivery delays, there are other approaches such as buffer inventories, JIT inventories, VMI, and VMR that can also be used to help protect against these issues.

Safety stock — recommended articles

Optimum size of the order — Cycle stock — Maximum stock level — Order point — Stock level — Buffer inventory — Reorder level — Minimum stock level — Economic batch size

References

• Graves, S. C., & Willems, S. P. (2000). Optimizing strategic safety stock placement in supply chains. Manufacturing & Service Operations Management, 2(1), 68-83.
• Ellinger, A. E. (2000). Improving marketing/logistics cross-functional collaboration in the supply chain. Industrial marketing management, 29(1), 85-96.