What Is Safety Stock?

Safety stock helps small-business owners combat fluctuations in consumer demand, supplier delays, and inaccurate inventory forecasts—but not without certain challenges.

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Inventory management is one of the biggest challenges facing today’s small-business owners. From ever-changing consumer demands to supplier delays and outages, there are countless factors that can make it difficult to determine reorder points and standard deviation of demand.

Fortunately, safety stock can help mitigate these inventory management challenges, as well as prevent stockouts. Check out our guide to learn more about the benefits (and a few risks) of safety stock, as well as how to calculate safety stock levels for your small business.

Table of contents

What is safety stock?

Safety stock is extra inventory purchased to help avoid stockouts (running out of stock). This additional stock is used as a buffer to mitigate risks like supplier delays, sudden increase in consumer demand, or inaccurate inventory forecasting.

What are the benefits of safety stock?

Small-business owners might choose to have safety stock on hand for a variety of reasons. In any case, safety stock is meant to combat uncertainty related to demand, lead times, and forecasting.

Here are a few of the many benefits of safety stock:

Reduce the chances of stockouts

Stockouts have a host of negative implications for small-business owners, leading to a loss of sales, decreased customer satisfaction, increased operational costs, and more. Having safety stock can help business owners avoid running out of stock even when unexpected events occur.

Buffer against demand uncertainty

Consumer demand can rise and fall depending on the season, current events, and shopping trends. And while it can be difficult for small-business owners to predict consumer demand, safety stock can give companies extra time to replenish stock when demand spikes.

Avoid risks of supply chain disruptions

Supplier disruptions might occur because of material shortages, natural disasters, operational issues, and many other reasons. These disruptions can have a negative impact on small-business owners seeking to restock products—but safety stock can help minimize these effects.

Increase customer satisfaction

In today’s highly competitive business environment, it’s essential for small-business owners to prioritize customer satisfaction. Having safety stock on hand helps to ensure happy, loyal customers who are confident they can always turn to their favorite brands to find what they’re looking for.

Improve efficiency

Safety stock makes it easier to operate a small business smoothly and efficiently. Customers can purchase the products they love, suppliers aren’t rushed, and employees aren’t overworked. Safety stock can also decrease the expenses related to rush shipping, urgent reorders, and forecast inaccuracies.

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Drawbacks of safety stock

Despite the many benefits of safety stock, this inventory management strategy comes with a few challenges small-business owners should be aware of too.

Here are a few concerns business owners should consider before ordering safety stock:

  • Excess safety stock. If a company orders too much safety stock, it could end up as obsolete stock that is difficult to get rid of.
  • Limited cash flow. Investing in safety stock requires cash—meaning small-business owners may not have as much money to put toward new products of cycle stock.
  • Increased storage costs. There’s no way around it: Keeping stock on hand costs money. Business owners will need to consider the cost of storage and warehouse staffing before purchasing safety stock.

How to calculate safety stock

Determining the right amount of safety stock is certainly an art form. Small-business owners can gauge the optimal amount of safety stock over time, depending on current consumer demand, lead times, and other factors.

Here is a baseline formula for calculating an average amount of safety stock, but just remember that it’s not a one-size-fits-all equation.

Safety stock = (max. number of units sold in a day ✖ max. lead time in days) − (average number of units sold in a day ✖ average lead time in days)

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The takeaway

Safety stock gives small-business owners peace of mind, even when they are faced with challenges like sudden changes in consumer demand or supplier delays. When carefully calculated, safety stock is one of the most effective ways to avoid stockouts and keep customers satisfied. However, it’s important for business owners to consider the challenges and risks associated with safety stock before ordering extra inventory.

Would you like to learn more about safety stock and other types of small-business inventory? Check out Business.org for The Ultimate Guide to Small-Business Inventory Management.

Related reading

Safety stock FAQ

What is safety stock?

Also known as buffer stock, safety stock refers to the extra inventory small-business owners may choose to store in order to avoid running out of stock. Business owners who store safety stock are better able to meet sudden, unexpected increases in demand and are less impacted by supplier delays.

How is safety stock defined?

Safety stock is a term used to describe the excess inventory business owners choose to keep in hand in the event of an increase in demand or supplier delay.

What are some examples of safety stock?

Safety stock is surplus inventory kept on hand to reduce the risk of running out of stock. For example, if a small-business owner typically sells 100 T-shirts per day and decides to store 5 days of safety stock, they would need to have 500 T-shirts on hand (100 products x 5 days). 

Likewise, if a business owner usually sells 25 phone cases per day and wants to have 10 days worth of safety stock, they would need to have 250 phone cases stored (25 products x 10 days).

Why is safety stock bad?

Safety stock reduces the chances of selling out of a product, but it also comes with some risks. Having too much safety stock on hand can result in higher holding costs, excess products that are difficult to sell, or limited cash flow. To avoid these challenges, business owners should carefully calculate the ideal level of safety stock.

How do you calculate safety stock?

While there are many formulas for calculating safety stock, the simplest equation is calculated by considering the number of units sold in a day and the amount of time it takes a supplier to deliver the stock.

Safety stock = (max. number of units sold in a day ✖ max. lead time in days) − (average number of units sold in a day ✖ average lead time in days)

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Brooke Kunz
Written by
Brooke Kunz
Brooke is a copywriter and artisan ice cream enthusiast dwelling in California's sunny Central Valley. She's happiest when hiking in the backcountry, baking an overly complex cake recipe, or reading an engrossing new memoir.
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