What is safety stock? The importance of retail buffer stock

Editorial Team

Two people looking at safety stock on tablet

The pandemic showed us the very real side effects of an upset supply chain system. From sidelined truckers interrupting product transport to factories and farms unable to process and harvest due to worker shortages, even the smallest ripples turned into majorly disruptive waves.

After all, when businesses have nothing to sell, they can’t make money, and consumers are left without essentials.

While supply chain disruption has improved, there are still challenges ahead. Here’s a look at some tips for handling product inventory that can help protect your business during difficult times.

What is safety stock?

Safety stock, also sometimes called buffer stock, is the extra inventory retail stores keep close at hand for those “just in case” situations. In other words, it’s the items in on-site storage that management doesn’t necessarily expect to sell, but that they might need if there’s a sudden run that alters normal sales patterns.

Think of safety stock in inventory management as a kind of tangible insurance. While it might seem like selling out of a particular product could be a big win, lack of product could mean loss of potential sales. Being able to restock shelves by dipping into those extra pallets or boxes could help increase your profits and boost customer satisfaction at the same time.

Benefits of safety stock

It’s hard to overestimate the importance of safety stock inventory, especially for businesses subject to seasonal demand.

Here are few of the key benefits of buffer stock:

Avoiding shortages/disruption in store offerings: Having safety stock on hand means you’re less susceptible to supply chain interruptions. Without safety stock, you have what you have from your original order and nothing more. If you need a couple cases of baby food each week but the next shipment is delayed by a week, you’re almost guaranteed a week of empty shelves. With safety stock, you have that buffer in place to keep selling baby food until the supply chain is back on track.
Pricing stability: Safety stock can also reduce the volume and intensity of price fluctuations, especially when we’re talking about stock held by large corporations or even the government. It’s a matter of supply and demand — if products run short, prices tend to rise, but extra stock could mean continuous availability and fewer pricing spikes.
Fewer customer service issues: Empty shelves can be frustrating to customers who need or want a certain item, and there can be long-term implications. Stores that regularly run out of products may be seen as less reliable or trustworthy, leading customers to take their business elsewhere.
Less administrative work: Having available buffer stock helps minimize customer service woes that require lots of attention. Complaints must be answered, and it takes staff lots of time and energy to set up and monitor waitlists and rain checks for sold-out items.

Safety stock calculation formulas

Once you’ve decided to invest in safety stock, how do you know how much to buy? Is there an actual safety stock formula? There are several formulas you can consider before placing your order.

General formula

Here’s one of the simplest ways to calculate basic safety stock needs:

Safety stock = (max daily usage x max lead time in days) – (avg. daily usage x avg. lead time in days)

Fixed formula

Fixed safety stock is a set number of items held on-site, with amounts based on historical sales.

Fixed safety stock = number of days x average daily usage

For example, if you were looking at a 30-day time frame with an average of 120 units sold each day, you’d keep 3,600 extra units on hand if you wanted to cover a complete month.

Time-based formula

This formula uses demand forecasts to determine safety stock inventory levels, so you’ll need two data sets: numbers for previous product demand and sales and projections from your business plan sales forecast.

Heizer & Render’s formula

This is the formula to use if you’re concerned about existing fluctuations in supplier schedules:

Safety stock = Z score x 𝜎𝑑𝐿𝑇

Z stands for the desired service factor (how much you want to deviate from normal demand to avoid selling out) and the rest of the formula stands for standard deviation in lead time.

Greasley’s formula

Perhaps the most complicated safety stock formula, Greasley’s, takes both supplier lead time and product demand fluctuations into account, using the following calculation.

Safety stock = 𝜎𝐿𝑇 (standard deviation in lead time) x Davg (average demand) x Z score

Understanding safety stock inventory and implementing a program to keep extra products on hand can help boost customer trust and prevent you from losing out on important sales. This is just one way to help protect your bottom line.

Contact a Clover Business Consultant to see how solutions such as a POS system with inventory management can help you run your business better.