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.
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.
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:
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.
Here’s one of the simplest ways to calculate basic safety stock needs:
Fixed safety stock is a set number of items held on-site, with amounts based on historical sales.
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.
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.
This is the formula to use if you’re concerned about existing fluctuations in supplier schedules:
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.
Perhaps the most complicated safety stock formula, Greasley’s, takes both supplier lead time and product demand fluctuations into account, using the following calculation.
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 SALES
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