What is safety stock?
Extra inventory held to cover demand fluctuations or delivery delays.
In detail
Demand is not the same every day, and suppliers may deliver late. Safety stock is the extra quantity held beyond normal usage to absorb this uncertainty. The more demand fluctuates and the longer replenishment takes, the more safety stock is needed.
For example
A product sells 100 units a day on average and replenishment takes 7 days. Since daily sales may reach 130 units in the peak season, around 200 extra units can be kept as safety stock to avoid stockouts.
How companies use it
Set safety stock higher for best sellers and for products where a stockout is costly, and lower for slow sellers. Once set, adjust it regularly based on actual sales.
Common misconceptions
Setting it once and never changing it, or setting it very high to be safe. Excessive safety stock ties up a lot of capital and warehouse space.
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