Safety stock: what it is and how it is calculated.
Safety stock is the cushion of units that protects you when sales rise more than expected or the supplier is late. Without it, the reorder point only works in a perfect week. Here is the formula, an example with numbers and how StockAI decides its size.
What safety stock is
It is the extra inventory you keep above what you expect to sell during the lead time. It exists because both demand and the supplier are uncertain: you may sell more than planned, or the order may arrive late. It is half of the reorder point: see how to calculate the reorder point.
The formula
Here z depends on the service level you want and σ measures the uncertainty during the lead time. With variable demand and a fixed lead time, only the variation in sales counts; if the supplier is also irregular, a second source of uncertainty is added and the two combine in quadrature.
The service level is the probability of not running out during a replenishment cycle. Usual z values: 1.28 for 90%, 1.645 for 95%, 2.05 for 98% and 2.33 for 99%. StockAI starts at 95%.
An example with numbers
The numbers are invented, to illustrate the rule. A product sells 20 units a day with a deviation of 6 units a day, and the supplier takes 9 days. At a 95% service level:
Now suppose the supplier is irregular: its lead time varies by about 2 days. The supplier’s lateness weighed more than the variation in sales, which is the reason to measure it instead of assuming it always delivers on time.
How StockAI decides it
StockAI computes the cushion per product, from the variability of its own sales, and adds the supplier’s irregularity from the deliveries you log. The service level starts at 95% and you can change it for the whole company, per supplier, per category or per product: a critical product can carry 98% and a secondary one 90%. The full calculation is described in how it is calculated.
An honest warning: on intermittent-demand products (many zero periods, then a sudden large sale) a formula based on the normal distribution does not hold the nominal service level precisely. StockAI does not print a percentage it does not keep: it marks those rows with an intermittent-demand notice.
What moves the size of the cushion
- More variability in sales, more cushion.
- A longer lead time, more cushion, though it grows with the square root of the lead time, not in a straight line.
- An irregular supplier, more cushion, and it can weigh more than demand itself.
- A higher service level, more cushion and more money tied up: each extra point costs more than the last.
The cost of overshooting and of falling short
A huge cushion looks safe, but it is money tied up and ageing product. An insufficient one produces stockouts and lost sales. That is why the service level should be set per product by how much running out hurts, and the overstock that builds up should be reviewed: inventory software for distributors.
Frequently asked questions about safety stock
What is the safety stock formula?
What service level should I use?
Are safety stock and minimum stock the same?
What about products that hardly sell?
And to see the product
See each product’s cushion computed from your own history.
Keep reading
- How to calculate the reorder pointWhat the reorder point is, the formula (demand during lead time plus safety stock), a worked example and how StockAI computes it for every product.
- Demand forecasting for purchasingHow to use demand forecasting to decide purchases: what is forecast, why one method is not enough, how error is measured and how StockAI does it.
- What is StockAIStockAI, or Stock AI, forecasts each product’s sales with AI models that compete on your history, and from that tells you what to order. What it is, who it is for and what it does not do.
Put your own AI to work forecasting your sales. Today.
Three ways to start, depending on how much you want to commit right now. All three lead to the same product.
Create your account
With the whole engine. Upload your sales file and see your first forecast, and with it your first list of what to order.
Create my accountLook before giving your email
An instant trial account with sample data. It lasts 24 hours and is then erased.
Try it without signing upTalk to us
For the corporate plan, the source code, or to see it with your data and someone beside you. We answer within 24 hours.
Sales and contact: contacto@stockai.es. Phone: +506 7186 2820.
Sales forecasting made in Costa Rica, for companies across Latin America.