Safety stock is a precaution against unanticipated circumstances. Basically, accurate safety stock calculations are critical for avoiding sales losses caused by stockouts or disruptions in the supply chain. But there is no one-size-fits-all formula for all organizations, so you’ll need to pick the best method for yours. As a result, in this article, we will provide the basic but important information you should know about safety stock.<\/p>
Safety stock is the extra goods you have on hand in case of an emergency or a breakdown in the supply chain that results in lower-than-normal inventory availability. Businesses typically try to forecast future sales and then manage inventory and expenditures per that forecast.<\/p>
This would be a pretty straightforward process if sales were steady and lead times for orders were never an issue. However, not everything in business is predictable, and the retail supply chain may experience delays.<\/p>
If your inventory prediction isn’t flawless, you can maintain safety stock to ensure you don’t run out of supplies. You can calculate how much safety stock you need using a straightforward method.<\/p>
Running out of stock is made easier by having safety stock. If you have enough safety stock, you won’t need to rely on your suppliers’ prompt deliveries or turn away clients because of low stock levels. You are covered by safety stock until your next shipment of ordered stock arrives. Let’s examine the value of safety stock for your company:<\/p>
Your safety stock shields you from sudden demand spikes and incorrect market predictions that can occur during a busy or festive season. It acts as a buffer when the ordered items arrive at your warehouse later than anticipated. It ensures your business doesn’t run out of in-demand products and enables you to fulfill requests constantly.<\/p>
Even if your supplier consistently makes on-time deliveries and you have never experienced a supply lag, this might not always be true. Your products may get to you later than anticipated due to unanticipated production or shipment delays, such as a bottleneck at your supplier’s end or a delivery delay brought on by bad weather. In these circumstances, safety stock serves as your buffer against a potential stockout scenario and aids in order fulfillment while you wait for your requested stock to arrive.<\/p>
The price of your goods may increase unexpectedly due to market changes. This could be brought on by a sudden shortage of raw resources, a rise in the price of raw materials, unanticipated market demand spikes, new rivals, or new government regulations. It can assist you in avoiding the expenditure of buying stock at higher prices without sacrificing sales if you have enough backup stock during these unforeseen events.<\/p>
Having too little inventory is a costly problem for companies worldwide. According to research by the IHL Group, stockouts cause $984 billion in missed sales globally, with North American businesses alone suffering a $144.9 billion loss. Businesses should keep safety stock on hand for several reasons, and it can rapidly show its worth when the unexpected occurs. The main justifications for having this extra inventory are listed below.<\/p>
While an inventory shortage might lead to missed sales, it’s not the only expense that firms face. Additional payroll expenses for administration and the warehouse are also probable, as is the chance that suppliers would charge more for expedited delivery. If the stockout is caused by higher demand that is anticipated to persist, these expenses might not be a significant issue. However, the cost might not be recovered, or even at all, for stockouts brought on by disruptions or other problems.<\/p>
Quick reorders are frequently necessary when there is a stockout, but most suppliers dislike being pushed because it might interrupt their business and customers. Safety stock eliminates the need for last-minute orders and ensures suppliers have a consistent workload. Similarly, businesses can maintain positive relationships with retailers by keeping their products in stock.<\/p>
One of the finest methods to maintain client happiness and loyalty is through safety stock. Customers who know that a business will always have what they need in stock are more likely to return and spread positive word of mouth about the business. Long-term, that pays off greatly and supports the expansion of your company.<\/p>
Demand fluctuations are one of the fundamental justifications for keeping a safe supply. Seasonal effects, abrupt changes in consumer preferences, panic buying, or the exit of a competitor are just a few of the many variables that might affect demand spikes. Companies have ample breathing room with safety stock to restock while satisfying the increased demand.<\/p>