Safety stock is a stock held by a company in excess of its normal requirements, safety stock is majorly a security strategy to curb the risk of stock out (Beattie 2015) . Safety stock can sometimes be referred to as buffer stock. Stock out can result from reduction in customers demand, inaccuracy and fluctuation in raw materials or packages, hence with safety stock; a company is able to operate adequately as planned. Different companies maintain their safety stock as a strategy to properly offer services to their customers, attend to new business opportunities and retaining the demand of their product in the market.
It’s important for a company to maintain its safety stock, and maintaining a safety stock, a company must take into consideration its customers average consumption in that period of time. This will act as a determinant on how much of the materials or package should be left as a safety stock. Therefore, safety stock should be sufficient to cover the customer’s demand, enough to cover in between the package or raw materials delivery period. However, much of the products should not be left as safety stock since it might make the company run into losses incurring the purchase and transportation costs. Aforementioned criteria can be used by a company to determine its safety stock; to begin with, a company should take into consideration the products delivery time for example a company’s product are delivered in 8 business days, so the company must take into consideration this 8 days in their safety stock. Secondly, a company needs to determine its customers daily consumption by taking into consideration the most selling months, therefore the company must leave some safety stock in this months for security purposes in case the sales will boom. Finally, the company must take the reorder into consideration in order to determine their safety stock (Hoheinsten 1982). Just as mentioned above, the delivery point is after 8 business days, so it’s in advisable for the company to make its reorder during this period to carter for the delivery period.
To calculate safety stock, the following must be taken into consideration; the demand rate, which is the amount of products usable or consumable on an average time by customers. Secondly, lead time is an important factor to consider in calculating the stock rate, where lead time simply means the period in between the reorder points and the point the actual delivery is made. How far actual demand maybe from forecasted demand should also be a major consideration in calculating safety stock, it often sometimes referred to as forecast error. Finally, service level which is the prediction whether the chosen safety stock will lead to stock out or will remain in stock till the next delivery.
Without safety stock, a company can prospectively lose its sales and their demand to its customers. So it’s always important to keep a safety stock, the discussed below are the major importance for keeping a safety stock.
- The first importance is for any business organization dealing with different products to always have some safety stock to act as an insurance against any changes in product demand in the market.
- Safety stock can always be used by a company as a product security measure in case the supplier makes his / her deliveries late. In addition some suppliers often supply substandard products that do not meet the company’s requirement, so safety stock will be in use for that period a company is ordering their preferred standard products.
- Another importance of safety stock when it’s in large amount is that it will enhance the customer’s service levels, and through this the company will be able to realize that excess safety stock is associated with storage problems, security and even maintenance. This will ideally help the company have enough amounts of safety stock that won’t interfere with the sales.
- Safety stock will always help a company expect any unexpected changes in demand; companies often determine this by planning their safety stock in terms of time.
Calculating safety stock model often lowers the inventory levels and increases the customers’ service. This is also an ignorable importance of safety stock, and once the calculations are made, a company will be able to determine what enough for its customers and what need to be added or subtracted. It’s also important for a company to track its safety stock as a unit of time and this will help predict the sales that will be on high demand to customers and this will help determine the average safety stock required by the company or business.
Safety stock can also be of importance when it comes to manufacturing strategy, sometimes the manufacturing of a product can take too long than the normal anticipated time, so a company can always use safety stock to sell to its customers especially when the demand is high. Safety stock will also prevent stock outs from unpredicted occurrences such as upward trends in customers demand (Enrico, 2015). Another great importance of safety stock is that it’s being used as a buffer to prevent unnecessary stock outs resulting from inaccurate planning and wastages. However a company can incur losses by holding time strict products such as food and drinks, these products are perishable and often get spoiled if hold in stock for a long duration. It’s always important to have a safety stock, since it will ensure a business continue operating even when the real products and raw materials are finished.
It’s a good idea for a company to try new products because the demands of different products changes with time, some products will decrease in demand while other products will increase in their demand. So companies tend to shift to new products with high demands. But they always have a backup safety stock for the actual product even if the older product back fire, they can always take the actual product from the safety stock to continue the business. Finally, safety stock is an important aspect of reducing lost sales cost of inventory. Companies are always scared by the fact that one of their biggest inventory holding costs includes the impacts of losing sales and customers because of lack of inventory (Thomopouloss, 2015).
The main idea behind safety stock is to ensure customers excellence, so before a company embarks on choosing the kind of safety stock it wants, it must consider the safety stock that will ensure customers are impressed ant this will in turn increase the rate of demand. Safety stock should be average and measured according to regular customers consumptions, it should not be so high since high or large amounts of safety stocks can run company into losses and it should not be very less that it can’t even meet the demand from the customers.
In conclusion, for a company or a business organization to be successful, it needs to protect its safety stock and this will ensure customers returning again. But companies that are not able to maintain their safety stocks, they will tend to lose most of the customers since they won’t be able to provide the flowing and endless product supply to customers
- Thomopoulos, N. T. (2015). Demand forecasting for inventory control
- Beattie, S. (2015). How to Start a Bit Stock Drill Business (Beginners Guide). London: Sam Enrico.
- Hohenstein, C. L. (1982). Practical stock and inventory techniques that cut costs and improve profits. New York: Van Nostrand Reinhold.