Safety Stock
The buffer inventory that protects you from forecast error, and supply delays.
Definition
Safety stock is the additional inventory you hold to protect against demand variability or supply delays. It ensures product availability when actual conditions deviate from plan.
Cheat Sheet
Why it Matters
Safety stock reduces stockouts, protects revenue, and lowers operational noise. It ensures your service levels remain stable without excessive capital tied in inventory.
How to Calculate
Most businesses use a service level based formula that multiplies variability by lead time and a statistical service factor.
Z is the service level factor. σdemand reflects forecast error or demand standard deviation. If lead time varies, use combined demand and lead time variability.
Benchmarks & Red Flags
Most mid sized businesses target service levels between 85 - 98%. Higher targets drive exponential increases in safety stock.
Red flags include
Common Mistakes
• Using fixed safety stock values without reviewing variability
• Setting service levels without linking them to margin or customer priority
• Ignoring lead time variability
• Applying the same safety stock across all SKUs
• Using unvalidated forecast error data
What to do if this metric looks bad
• Audit forecast accuracy and clean the input data
• Segment SKUs by margin and demand pattern before setting service levels
• Validate supplier lead time performance and improve reliability where possible
• Recalculate safety stock with updated variability and service targets
• Run scenarios to quantify cash and service impact
