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Concept
Safety stock
Summary
Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts (shortfall in raw material or packaging) caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.
Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock. It acts as a buffer stock in case sales are greater than planned and/or the supplier is unable to deliver the additional units at the expected time.
With a new product, safety stock can be used as a strategic tool until the company can judge how accurate its forecast is after the first few years, especially when it is used with a material requirements planning (MRP) worksheet. The less accurate the forecast, the more safety stock is required to ensure a given level of service. With an MRP worksheet, a company can judge how much it must produce to meet its forecasted sales demand without relying on safety stock. However, a common strategy is to try to reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. That can be extremely important for companies with a smaller financial cushion or those trying to run on lean manufacturing, which is aimed towards eliminating waste throughout the production process.
The amount of safety stock that an organization chooses to keep on hand can dramatically affect its business. Too much safety stock can result in high holding costs of inventory. In addition, products that are stored for too long a time can spoil, expire, or break during the warehousing process. Too little safety stock can result in lost sales and, in the thus a higher rate of customer turnover. As a result, finding the right balance between too much and too little safety stock is essential.
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