3 Key Parameters to Perfect your Safety Stock Calculation

Person laying down in a warehouse

Maintaining the correct inventory level for your wholesale distribution business is essential to keeping your customers happy and maintaining a healthy bottom line. However, calculating the proper safety stock levels can be tricky. 

When calculating inventory safety stock levels, many business owners find themselves at a loss. One of the most essential areas of a distribution business is inventory. Ensuring that you have the right amount of inventory is crucial to success. However, predicting how much inventory you need can be difficult, especially when it is constantly in flux.

This blog post will discuss three important factors to remember when calculating your inventory safety stock levels.

Service Level Targets

One way to make this process a bit easier is to use service level targets to help you calculate your inventory safety stock levels. Service level targets are essentially goals or benchmarks that dictate how often you should meet specific customer fill rates. 

By using service level targets as a guide, you can learn how much inventory you need to maintain to ensure that your customers are always appropriately serviced. 

Demand Deviation

When calculating safety stock, it is also essential to consider all potential factors that could impact demand. One of the most important of these factors is demand deviation. 

Demand deviation can have a significant impact on safety stock levels. When demand falls outside the expected range, it can leave warehouses with insufficient stock to meet customer needs. This can lead to missed sales, lost revenue, and dissatisfied customers. It can even lead to warehouse closures.

There are several ways to minimize the impact of demand deviation on safety stock calculations. The most crucial step is to track and predict demand fluctuations accurately. You can use historical data to create a reliable forecasting model. Once you have a good forecasting model in place, you can use it to adjust your safety stock levels accordingly.

Another way to mitigate the effects of demand deviation is to increase your flexibility in terms of inventory management. You can consider quickly adapting your ordering schedules in response to unexpected changes in demand. Having a well-organized warehouse helps, too, as it allows you to locate and restock items running low.

When calculating your safety stock levels, it is essential to account for the risk of demand deviation. Using sound forecasting techniques and being flexible in your inventory management can help minimize the negative impacts of unexpected changes in demand.

Lead Time Forecast and Variance

Regarding maintaining the correct safety stock level, lead time and lead time variance are essential factors to consider. Lead time is the arrival time it takes for a product to move from supplier to customer, while lead time variance is the variability in that lead time. Both of these factors can have a significant impact on your inventory levels and your bottom line.

Let’s start with lead time. The longer the lead time, the more inventory you need to maintain to avoid stock-outs. This is because it takes longer for new stock to arrive once ordered. And if there is a significant increase in lead time, it can seriously impact your business, leading to lost sales and revenue.

Lead time variance can also have a negative impact on your business. A high degree of variability in lead time can cause fluctuations in inventory levels, which can lead to excess inventory or stock-outs. This can result in lost sales and increased costs, which can seriously impact your bottom line.

Make sure to account for lead time and lead time variance when determining your safety stock levels.

So, how do you ensure you have the proper safety stock level? It all comes down to understanding the impact of service levels, demand deviation, lead time, and lead time variance on your business. By considering these factors in your warehouse, you can ensure that you have the right inventory level to meet your needs and avoid any costly stock-outs.

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Dan Kiefer
Dan Kiefer
VP of Solutions

Author’s Note:

This blog post was provided by K3S, a leading provider of inventory replenishment solutions for wholesale distributors. You can visit our website or contact us today for more information about our services. Thanks for reading!

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