Inventory and stock
Safety stock formula: meaning and example
Definition
Safety stock: Safety stock, or buffer stock, is extra stock kept to cover sales spikes and late deliveries, so you do not run out while a new order is on its way.
Also called: buffer stock, safety stock formula, minimum stock, reserve stock
What safety stock is for
Sales are never exactly average, and suppliers are not always on time. A truck is held up, the monsoon closes a road, or a festival week doubles demand. Safety stock is the cushion that keeps you selling through those days. It is part of your reorder level, not a separate order.
Safety stock costs money: cash tied up, godown space and, for perishable goods, the risk of expiry. Running out also costs money: the lost sale, and often the customer, who buys elsewhere next time. The right amount balances the two.
Safety stock formula
The simplest version is days of cover: safety stock = average daily sales × the number of buffer days you want. A more careful version uses your worst recent days:
- Safety stock = (maximum daily sales × maximum lead time) − (average daily sales × average lead time)
- Maximum daily sales: the highest sales on a normal trading day over the last few months.
- Maximum lead time: the longest a delivery from this supplier has taken recently, in days.
How much is too much
Larger businesses use a statistical formula based on how much daily sales vary, but for most small businesses the versions above are enough. Keep more safety stock for fast sellers, products from distant or unreliable suppliers, and goods customers will not wait for. Keep less for products with a short shelf life, slow sellers and anything you can buy locally the same day. Expired stock is not safety stock, so count only stock you can actually sell. Review the numbers before festival season and after a change of supplier.
Worked example
Safety stock for a masala distributor
A distributor sells an average of 30 kg of turmeric powder a day, and up to 45 kg on a busy day. Deliveries usually take 4 days but have taken 7. Safety stock = 45 × 7 − 30 × 4 = 315 − 120 = 195 kg. The reorder level is then 30 × 4 + 195 = 315 kg. At a cost of ₹180 a kg, the buffer ties up 195 × ₹180 = ₹35,100, which the owner weighs against losing a week of turmeric sales.
In managemate
managemate has no separate safety stock field. Include the buffer in the product's Reorder at level: in the example above, enter 315 kg. The reorder list counts only unexpired stock plus what is already on order, so expired lots never count as part of the buffer. Products at or below their level show in Today's plan and, unless enough is already on order, on the reorder list, with a suggested quantity of reorder level + order quantity − available − already on order.
Where this shows up in managemate
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