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Benefits of Safety Stock in the Company’s Supply Chain

For trading companies, supply chain management is important to support and manage operational activities. Safety stock is management that can help the supply chain continue to operate. So that it can minimize the delay in the delivery of an item. Safety stock has many benefits for the company if you implement it. With good supply chain management, the chance of delays in the delivery of goods will be small.

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Safety Stock is

Safety stock is inventory that the company prepares to prevent a shortage of inventory when market demand conditions are uncertain. These factors have an impact on inventory that requires a certain period of time before the goods arrive. Experts argue that this is a number of product inventories with initial demand on the estimated total demand for goods in the future. In conclusion, this is a method to minimize fraud in the inventory of a trading product. In a trading company accounting system, this system is useful for calculating the quantity of a product. Therefore, companies need special calculations to meet consumer demand. In addition, you can also use Inventory Management Software in optimizing inventory levels.

The Importance of Safety Stock in Business

The safety stock aims to gain profit, anticipate fluctuation demand, and facilitate production schedules. Market conditions will affect the law of supply and demand. If market conditions are always dynamic, the company will implement this system to anticipate changes in market conditions and take more profits. It aims to determine the right inventory. If the inventory is too large, the circulation of money will stop in trading capital. Conversely, if the inventory is too small, the company will experience a stock out.

safety stock
Source: freepik.com

Factors that cause stock-outs are demand fluctuations, inaccurate forecasts, as well as varying lead times. Therefore, this is necessary to help minimize stock-outs, by comparing the number of service levels that are in accordance with stock-outs. This can also have an impact on deviations from the previously planned schedule. For example, if the company determines the service level is 98%, then the remaining 2% are purchase orders from stock out and only 98% can be processed. You can get that from the formula for calculating safety stock. You can also use the ERP system to facilitate company operations.

Also read: The Importance of an Inventory List for Companies

How to Calculate Safety Stock

In determining the service level, you can see the SS formula based on actual demand data. Furthermore, the calculation of the standard deviation needs to be multiplied by the safety factor. Here’s the complete formula:

Safety stock = safety factor × standard deviation or, Safety stock = Z×√((PC/T)×σD)

Description:

Z = safety factor

PC = performance cycle (forecast cycle and order cycle)

D = standard deviation

T = cycle period of demand

The steps for calculating safety stock are divided into several stages. In the first step, you need to calculate the maximum sales and daily average sales. Then, calculate the maximum wait time and the daily average wait time. After that, enter the formula:

Safety Stock = (Max daily sales × Maximum lead time) – (Average daily sales × Average lead time)

The formula is from reordering points and is useful when market changes occur over a long period of time (≥ 2 years). You can improve this reorder point calculation by compiling an income statement every 3 months.

Also read: Gross Margin: Definition, Formulas, and Examples

Conclusion

From this explanation, it can be concluded that this is a method to minimize the lack of inventory of a trading product. The thing you should do as a manufacturing business is to do inventory management. Companies also need to use more measurable planning and calculation before purchasing goods so that there are no delays in product delivery.

safety stock

It is also important to minimize costs related to inventory management. To make it easier to manage your inventory in the warehouse, you can use the Inventory Management System from HashMicro which makes managing and optimizing stock level, seamless inventory tracking, monitoring stock on hand more automatic and easy. Schedule a free demo now to be able to implement this system immediately and get the right solution for your business and investment.

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Muhammad Syahrian
Muhammad Syahrian
Content Writer Intern at HashMicro. Passionate and hardworking person to develop my marketing skill.

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