Has your business or warehouse ever come across a situation where orders came in for an item and then it was realized that you had run out of stock. Stock outs are never an ideal situation and can be frustrating for businesses and customers alike. Not only does your business miss out on potential revenue but it can also result in the loss of a customer.
Ideally businesses want to make sure that they never run out of stock, especially for popular items. This is what safety stock is all about. In today’s article we’ll discuss what safety stock is, how to calculate it, and how it can be managed effectively.
Safety stock as a concept is pretty straight forward in that it is the number of products a business keeps on hand as a buffer to prevent stock outs. The idea behind safety stock is that it provides a safety net to account for variables such as unforeseen excess demand, supplier delays, inaccurate forecast planning, and so on. As a consequence, safety stock reduces the likelihood of stock outs and allows business to continue as usual allowing time for new stock to be replenished.
Of course, knowing how much safety stock you should carry is an important question and depends on various factors. When planning your safety stock consider how long product lead times are, that is from the time you place an order to the time it takes to receive them. Also consider the average number of sales of an item over a given period. Getting this right is important because having too much or too little safety stock can both be a problem for your business. As well there are financial repercussions in both scenarios. Too much safety stock and a business may find earnestly needed capital tied up in excess inventory. Too little and the business risks missing out on revenue, potentially paying more for raw materials, and losing customers.
Calculating how much safety stock you need then is an important exercise. There are many ways to calculate safety stock but a general formula for doing so is as follows:
Max daily usage is the maximum number of a given product sold in one day over a given period. Your average daily usage would be calculated based on the same period as your maximum daily usage. Now this formula doesn’t account for seasonal demand fluctuations, but it can be used for those given periods so that you can adjust your safety stock accordingly.
Your safety stock planning should any case be something that you adjust over time as demand fluctuates. Certain items may fade while others may see increase in demand resulting in greater orders. In either scenario you’ll want to make sure that you adjust your safety stock accordingly.
Of course, ensuring that you’re tracking all this data is important. Fortunately, this is where a WMS can help. A WMS will be able to track and gather of all the information you need to be able to calculate your inventory safety stock number. For example, you will be able to track how many orders you fulfill for each item you inventory, how long it took for items to arrive at the warehouse, which periods see increased demand for particular items, and so on. Having a WMS like Akatia’s WAM WMS for Salesforce will also give you the reporting functionality to extrapolate and consolidate all this data and make decisions based on it.
Furthermore, a WMS will also be able to track re-order points based on the stock you currently have and allow you to set re-order thresholds which can automatically be triggered to alert procurement staff. With a WMS you can also assign specific characteristics to your storage locations. Thus, you can clearly set locations so that they are reserved strictly for storing your safety stock keeping it separate from your general stock used for fulfillment. A WMS will also help manage what stock you’re drawing from to replenish picking locations, ensuring that your inventory safety stock is cycled correctly and not left idly sitting in your warehouse as new stock arrives.
As we can see there are significant benefits to keeping a safety stock. Not only will it allow business to operate without disruption, but it can reduce costs, and keep customers happy. Of course, like any strategy employed that strengthens your supply chain it must be well thought out so that you don’t run the risk of carrying a safety stock which is either too large or too little, both of which can have negative consequences. Thus, basing your decisions on proper data and having the right technology like a WMS to track and manage your inventory and fulfillment will help support your efforts. In doing so you will ensure the strengthening of your business so that it can withstand the fluctuations so common in supply chain based and demand driven industries and markets.
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