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Important Benefits Of Safety Stock And How To Calculate It

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Important Benefits Of Safety Stock And How To Calculate It

Try you imagine, what would happen if suddenly a sudden surge in market demand for your product? What would you do? Do you have enough inventory to satisfy your customers? Or do you have to hang and delay the customer's request?

If you feel unsure, then you may need to rethink the importance of investing in inventory. Even if you think that you can handle such situations, your business is still very vulnerable to the occurrence of uncertain shifts in the market and on your supply chain system.

One of the best ways to keep your business can satisfy your customers is to have a safety stock. We'll cover some benefits of a security stock and show you how to use one simple formula to calculate it.

But before, let's define first what is the purpose of the inventory of safety stock?

What is the safety stock Inventory?

As the name suggests, safety stock is a small amount, the surplus amount of supplies you remain available to guard against variability in market demand and Lead time order delivery of goods from Supplier.

If you are trying to implement a timely inventory (Just In Time), then you may not want to invest in this method of safety stock.

However, if you like the majority of retailers and wholesalers who use the Just In Case (JIC) inventory strategy, the safety of goods is essential for your business operations and offers many benefits for you.

What are the benefits of safety stock?

Safety stock plays an integral role in the smooth operation of your supply chain in a variety of ways.

And here are some of them:
  • Protection against unexpected spikes in demand
  • Prevention
  • Compensation for inaccurate market predictions
  • And buffer for a Lead time longer than expected
  • You may notice that the benefits of safety stocks are all bound to mitigate serious problems that could harm your business.
That's because without safety stock, then your company can experience the following things:
  • Loss of revenue
  • Loss of customers
  • And losses in market share
  • With safety stock, you can safely avoid most of these problems.
Of course, despite its benefits, too much safety stock can incur a fairly sizable cost, so in this case, you will need to reduce inventory or increase your sales turnover rate.

This is why it is very important to know how to order the right amount of safety stock to safeguard against variability in your market and supply chain, meaning do not order too much safety stock because of the risk of losing capital in the long term.

To get the right amount, let's see how to calculate the safety stock inventory using a proven formula.

How do you use the safety stock formula for accurate calculations? A safety stock formula is relatively easy and requires only a few inputs to calculate.

Here's an example of a formula you should use if you're just starting:

(Max daily sales x Max lead time in days)-(average daily sales x average lead time in days) = Safety Stock Inventory

To demonstrate how it works, here's an example to use this formula:

Suppose there is a shop in Indonesia called Herbal healthy. This store sells honey imported from Brazil.

On average, the store sells about 5 bottles of honey every weekday. And on weekends, it can sell about 10 bottles of honey.

The average time required to get the delivery of honey from Brazil is 40 days. Although, due to the limited availability of interest and other environmental factors, it can even take up to 50 days to receive delivery (maximum lead time).

If the store wants to make sure he always has enough honey in his shop to meet the customer's demands, he can use this formula to find out:

(10 x 50) – (5 x 40) = 300

If the store sells about 45 bottles per week (5 per weekday, 10 on weekends) equivalent to 180 bottles a month, then with this calculation he will have enough stock to last him about a month and a half.

That is an article about the benefits and importance of Safety Stock and how to calculate it. Hopefully useful and can give an added value to you.

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