We plan. We negotiate. We buy. We do all that we can to keep those supply chain wheels turning so that we can have enough stock on hand to cover all our demand. Sometimes, even planning to the finest detail internally does not safeguard us from risk. Our ideal supply chain world can be shaken without any notice. What? Why? How? The simple answer is external factors. Remember COVID-19? Who could have been prepared for the impact on our supply chain that it had? Ports were closed, deliveries were stopped and factories were not able to function. We don’t just need to talk about the extremes though. How about the impact on a simple customer order when our supplier does not deliver our stock on time? Or when they arrive with only half our order? That stock not being delivered on time and/or in full could impact the service delivery that we have to our customer, depending on our own inventory levels. To mitigate the risk of the external factors, we need to carry an extra level of stock. Not just any stock, but the right amount of stock to be kept as a buffer for “just-in-case”. We can call this stock, Safety stock.

Safety stock is a calculated level of stock required to mitigate risk that impacts our inventory level. The app looks at the various factors posing a risk and calculates the best required safety stock that we should keep in order to keep our head above water when the supply chain ship threatens to sink.

Late supply - your supplier agrees to a 7 day lead time. However, it’s day 9 and you have received nothing. This could be for a number of reasons. Perhaps the supplier’s machine shut down at the plant, or they could not secure a truck for delivery. That means you do not receive the stock at the date you expect it, which could lead to an out of stock situation.

Short supply - you’ve ordered 100 water-pots due to a big garden show that one of your customers is hosting. They are due to pick up the order tomorrow, so your incoming delivery today needs to be received and checked at the soonest. Your supplier delivers the stock, but - oh no - they have short supplied you. Instead of showing up with 100 water-pots, only 50 arrive. Why? That question is for your supplier. But for right now, we’re again going to be out of stock.

Unpredicted demand - perhaps someone on social media mentions your product which sparks some interest. Suddenly your demand on a generally average selling product spikes. All those unpredicted sales may be good for business, but because you were not prepared for the goods to be consumed that quickly, it eventually leads to (you guessed it), an out of stock situation.

It’s fair to say that for these three reasons, we are at risk of stocking out. Therefore, that layer of safety stock is required to prevent us from stocking out and losing a sale, or potentially a loyal customer.

Safety stock is an input into the order calculation, so it is important to know what factors are involved in calculating your safety stock level. To find out more, please read the article: The five factors that influence the calculation of Safety stock.