A supply chain management system is necessary for a trading organization to support its operational activities. Well, safety stock is one type of management that may assist the supply chain to continue to function, hence reducing delays in an item’s delivery. But in detail, what does safety stock mean? What advantages may businesses have from using this term? How are the computations carried out? Continue reading this article about safety stock to the end to get the solution.
Safety Stock Definition
Inventory utilized in an emergency is known as safety stock. This situation arises when inventory levels at the firm are lower than the amount of demand. As buffer stock, the following components of the business are frequently referred to.
Additionally, safety stock is an additional supply of products that fills the gap left by a lack of items when a distribution network bottleneck arises. Because sales operations may go on despite impediments thanks to the inventory, the firm can operate more easily.
Assauri defines safety stock as the company’s preparedness for supplies offered when there is ambiguity regarding market demand. He believes that when the delivery duration is unpredictable, this factor will either benefit the firm or hurt it.
Chase, Jacob, and Aquilano contend that safety stock results from the initial demand in addition to the anticipated overall demand for commodities throughout the following time. Additionally, he asserts that safety stock can help to reduce the likelihood of inventory fraud.
Safety Stock Benefits
A particular formula is used to determine the quantity of an item needed to fulfill demand from customers. Changeable market interests have a big impact on inventory-related operations. The advantages of safety stock include maximizing earnings, avoiding changes in market demand, and assisting corporate management by making it easier to schedule the production of commodities.
Safety stock also aids businesses in calculating the precise quantity of inventory. It should be noted that having too much inventory will hurt the firm while having too little will make the company more likely to run out of products. This evidence leads to the conclusion that keeping a safety stock on hand helps the firm maintain high profitability even in emergencies by lowering the likelihood of stock-outs.
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Safety Stock in Supply Chain Management
When it comes to supply chain management, safety stock is crucial. This approach is intended to increase profitability, foresee changes in market demand, and facilitate the scheduling of the production of commodities. Since the market’s conditions continually affect the law of supply and demand, if the market is always changing and volatile, businesses must use safety stock to foresee shifts in demand and maximize earnings.
To calculate the precise quantity of inventory, safety stock is also necessary. The flow of money in the company’s trading capital will halt if there is too much inventory. On the other hand, if there is insufficient stock, the business will experience a stock out.
Demand changes, incorrect forecast implementation, and a wide range of lead times are some variables that contribute to stock outs for businesses. Since more service levels are directly linked to stock outs, safety stock can be employed to reduce stock outs.
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Calculation of Safety Stock
The safety stock calculation formula is broken down into numerous categories based on requirements. Think about how to calculate the following safety stock to have a better understanding of which formula is correct.
Temporal Count
The following safety stock calculation technique will assist you in determining the number of inventory reserves within a specific time frame based on an examination of the expected demand for items. Data on demand and product sales from the prior period, along with projections of the amount of demand in the future, round out this strategy. Additionally, information on demand and product sales includes the number of units sold and the number of goods with low or unavailable inventories.
Meanwhile, barometer methods, trend forecasts, and market research may be used to determine future demand. As supplementary information, this approach is suggested for stores where supply and demand are likely to be steady. This method’s drawback is that it is unable to foresee the future, which leaves room for company operations to be disrupted.
Determine the Fixed Reserve Inventory
In light of the information provided above, safety stock is an emergency inventory, whereas reserve stock refers to the number of things that are kept on hand as extra supplies for each item.
However, the majority of business owners utilize Fixed reserve inventory = Number of days x Average daily sales, even though there is no official formula for determining fixed reserve inventory.
Greasley Technique
Greasley’s approach is based on the lead time of the distributor and the rise in product demand. Here is the method used to determine this safety stock so that you can understand it better:
Z score x Lead Time x Standard Deviation x Average Demand = Reserve Inventory
The degree of services offered by company management is represented by the z score. The lead time is the period between placing an order and receiving it. The range and magnitude by which a supplier’s lead time deviates from the real are measured by its standard deviation.
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Hopefully, understanding this information about safety stock can help your business run smoothly. Both from understanding benefits to methods for calculation.
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