What is safety stock?
Safety stock is the extra stock that you hold above the expected demand, so that you do not run out when demand is higher than the forecast or a delivery arrives late.
The correct level depends on three things: how much demand changes from day to day, how much the lead time changes, and how often you accept a stockout. A higher service level needs more safety stock, and the amount rises quickly above 95%.
The formula
Safety stock = Z × √(LT × σd² + d² × σLT²)
- Z is the service level factor. For 95%, Z = 1.65.
- LT is the average lead time, in days.
- σd is the standard deviation of daily demand.
- d is the average daily demand.
- σLT is the standard deviation of the lead time, in days.
A worked example
Cold Craft, Madagascar Vanilla 500ml tub
- Average demand is 40 tubs a day, with a standard deviation of 12 tubs.
- An imported ingredient sets the lead time: 9 days on average, with a standard deviation of 3 days because of port delays.
- LT × σd² = 9 × 144 = 1,296, and d² × σLT² = 1,600 × 9 = 14,400.
- Safety stock = 1.65 × √15,696 = 1.65 × 125.3 = 207 tubs.
With demand changes only, the answer is 59 tubs. The variable lead time adds almost 150 tubs. For an importer, the reliability of the supplier often matters more than the forecast.
Safety stock in Miridia
Miridia stores a safety stock level for each product at each location, and it uses that level to draft purchase orders. Miridia Planner calculates safety stock from the demand during the lead time, and it updates the level when the forecast changes.