Safety Stock
Safety stock is the additional units of stock kept over and above the average level of stock. Companies maintain such stock to minimize the risk of getting out of stock. A Safety stock calculator is a tool to help in making such calculations easy.
Reasons for Maintaining Safety Stock
Some reasons why companies maintain safety stock are as below:
- When the suppliers are unable to deliver orders on time, safety stock is of great help to satisfy customer demands.
- Safety stock help to meet orders in the case where the actual demand exceeds the estimated demand.
- When the transporters or laborers are on strike, safety stock does not let sellers run out of stock.
Formula
Safety stock is calculated by subtracting average daily usage for the average lead time from maximum daily usage for the maximum lead time. Following is the mathematical presentation of the formula:
Safety Stock = (Maximum daily usage *Maximum lead time) – (Average daily usage * Average lead time)
About the Calculator / Features
The safety stock calculator is easy to use as an online calculator. The user is required to put the following details into it.
- Maximum daily usage (in units)
- Maximum lead time (in days)
- Average daily usage (in units)
- Average lead time (in days)
Calculator
How to Calculate using Calculator
The calculator requires the following variable for a quick calculation result:
Maximum Daily Usage
It is the maximum number of usage of units in production or sales during a day.
Maximum Lead Time
It is the maximum time supplier takes to deliver the order. This is expressed in a number of days.
Average Daily Usage
Daily average usage defines an average number of units consumed in production or sold during a day.
Average Lead Time
It is the average time supplier takes to deliver the order. It is also expressed in a number of days.
Example of Safety Stock
An example will help in making the concept easier.
Following are the details of X Ltd.
| Particulars | |
| Maximum Daily Usage (Units) | 12 |
| Maximum Lead Time (Days) | 20 |
| Average Daily Usage (Units) | 9 |
| Average Lead Time (Days) | 16 |
Safety Stock = (12 * 20) – (9 * 16) = 96
Interpretation
The above example simply means that to avoid any interruption in the supply of products, X Ltd. has to maintain a safety stock of 96 units. This safety stock of 96 units can help the company if there is a possibility of occurrence of an unlikely event. And that could be excess production or sales requirements, or the supplier is taking more than the normal time to supply.
Cautions
Safety stock is the additional stock kept over and above the average level. This means maintaining such additional stock will increase the cost of the company. Sometimes companies keep a safety stock of units which is more than necessary. Such excessive stock leads to blockage of funds. Nowadays, most companies have shifted to the method of just-in-time. It ensures that orders are received by producers or sellers at the time they require them. This leads to a reduction of waste as well as cost. Also, it reduces idle time by providing the required quantity at the scheduled time of manufacturing.
