Safety Stock Calculator

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. 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 order on time, safety stock is of great help to satisfy customer demands.
  • Safety stock help to meet orders in case where the actual demand exceeds the estimated demand.
  • When the transporters or labors are on strikes, safety stock does not let seller 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 online calculator. User is required 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)
Safety Stock Calculator

Calculator

How to Calculate using Calculator

Calculator requires 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 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 number of days.

Example of Safety Stock

An example will help in making 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 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.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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