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If the supply and demand are consistent, you may not require large amounts of safety stock. For example, products like razor blades are bought year round which makes it easier to define reorder quantities. 1) Demand UncertaintyĮvery retailer and manufacturer will have products that sell well all year round and products that fluctuate in demand. Why Do You Need a Safety Stock?Īlthough we know the consequences of not having enough stock, why do you need safety stock in the first place? The reason for having a safety stock strategy is to protect you against two external factors over which you have little to no control: demand uncertainty and lead time uncertainty. However, this is where a safety stock formula comes in.īecause there are multiple formulas for determining safety stock it can be a little complex, but this article will guide you through the various safety stock calculations and how each fits with the ordering process. Trying to plan for these variables and maintain a target inventory level can be difficult. Variability in lead times for raw materials.One of the main reasons that retailers and manufacturers implement a safety stock strategy is to prevent stockouts. This means it’s additional stock above the desired inventory level that you would usually hold for day-to-day operations. Safety stock is simply extra inventory held by a retailer or a manufacturer in case demand increases unexpectedly.
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What is Safety Stock?īefore we dig into explaining how to use a safety stock formula, it’s useful to define what the term safety stock actually means. Using a safety stock formula helps you to take a data-driven approach to inventory management, maximizing sales and ultimately profits.
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However, this isn’t recommended as it can cause issues with stock outs causing customer frustration and lost sales. New trends, fluctuating demands and a constantly changing retail landscape all impact which products should be stocked and how many of each must be on the shelves and in the warehouse to maximize efficiency and reduce costs.įor some retailers, a safety stock calculation can simply be a gut-feeling, an educated guess at what they think is right. One of the biggest challenges in modern retail and manufacturing is stock management.
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