How To Set Safety Stock Levels in Retail and E-commerce Inventory Management

How To Set Safety Stock Levels in Retail and Ecommerce Inventory Management

Safety stock is an important concept in inventory management, as it helps retailers to ensure that they have enough products on hand to meet customer demand, even in the face of unexpected events such as supplier delays or unexpected spikes in demand. There are a number of different methods that retailers can use to calculate safety stock, each with its own benefits and limitations. Retail planning software solutions like omnithink.ai can help forecast demand and recommend appropriate safety stock levels using a variety of methods. Here’s a closer look at some of the most common methods, along with specific examples of when they might be used:

Fixed safety stock: Fixed safety stock involves setting a predetermined safety stock level for each product, regardless of demand or other variables. This method is simple and easy to implement, but it can be less effective in cases where demand is highly variable. For example, a retailer might use fixed safety stock for a product with consistent demand, such as a household cleaning product.

Percent of sales method: The percent of sales method involves calculating safety stock as a percentage of the average daily or weekly sales for a product. This method can be more effective in cases where demand is highly variable, as it takes into account fluctuations in demand. For example, a retailer might use the percent of sales method for a product with seasonal demand, such as a snow shovel.

Reorder point method: The reorder point method involves calculating safety stock based on the lead time for a product and the expected demand during that lead time. This method can be more effective in cases where lead times are long or uncertain, as it helps to ensure that there is enough inventory on hand to meet demand until the next order arrives. For example, a retailer might use the reorder point method for a product with a long lead time, such as a specialty appliance.

Demand forecasting method: The demand forecasting method involves using data on past demand to forecast future demand and calculate safety stock based on that forecast. This method can be more accurate in cases where demand is predictable, but it requires more data.

Min/Max method: This method involves setting minimum and maximum inventory levels for each product, with the goal of maintaining an optimal level of inventory to meet demand. The minimum level is the point at which the retailer needs to place a new order to avoid a stockout, while the maximum level is the point at which the retailer needs to stop ordering to avoid excess inventory. This method can be effective in cases where demand is fairly predictable and lead times are reasonable.

Days of supply method: The days of supply method involves calculating the number of days that a retailer’s current inventory will last based on the average daily demand for a product. This method can be useful in cases where demand is highly variable, as it helps retailers to adjust their inventory levels in real-time in response to changing demand.

In general, the min/max method is more appropriate for retailers with predictable demand and reasonable lead times, while the days of supply method is better suited for retailers with more variable demand. However, the best method for a particular retailer will depend on a number of factors, including the nature of its products, the predictability of demand, and the reliability of its suppliers.

But What About the APICS definition of Safety Stock?

The APICS calculation of safety stock is a widely used method for calculating safety stock that is based on the principles of the APICS Certified in Production and Inventory Management (CPIM) program. Here’s a closer look at the APICS calculation of safety stock and when it might be most appropriate for retailers:

How the APICS calculation of safety stock works: The APICS calculation of safety stock is based on the following formula:

Safety stock = (Z-score x standard deviation of lead time demand) + (Z-score x standard deviation of demand during lead time)

This formula takes into account the variability in both lead time and demand in order to determine the optimal level of safety stock. The Z-score is a statistical measure that represents the number of standard deviations a particular value is from the mean. It can be used to calculate the likelihood of an event occurring, such as a stockout or excess inventory.

When to use the APICS calculation of safety stock: The APICS calculation of safety stock is best suited for retailers with moderate to high levels of demand variability and moderate to long lead times. It can be particularly effective in cases where the retailer has good data on past demand and lead times, as this data can be used to calculate the standard deviations needed for the formula.

Key considerations: There are a few key considerations that retailers should keep in mind when using the APICS calculation of safety stock:

Data quality: The accuracy of the APICS calculation of safety stock depends on the quality of the data used to calculate it. It’s important for retailers to ensure that their data is accurate and up-to-date in order to get the most accurate results.

Lead time variability: The APICS calculation of safety stock assumes that lead time variability is constant. This may not always be the case, so retailers should be sure to consider the variability of their lead times when using this method.

Safety stock levels: The APICS calculation of safety stock can produce relatively high safety stock levels, especially in cases where demand and lead time variability are high. Retailers should consider this when deciding on their safety stock levels, as higher safety stock levels can result in higher inventory carrying costs.