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What is Safety Stock? Definition, How to Calculate & Why DTC Brands Need It
In the world of ecommerce, running low on stock is somewhat inevitable. And yet, low inventory levels don’t have to stall your operations or clog your cash flow. That’s where safety stock comes in.
By utilizing safety stock, direct-to-consumer (DTC) brands can continue selling while they wait on replenishment. And they can ensure their customers never encounter a stockout.
Plus, well-managed safety stock can boost your brand’s image by providing reliable, reputable service to your customer base.
Read on to learn all the ins and outs of safety stock in this comprehensive guide.
Safety stock is the extra inventory you keep on hand to protect against demand and supply chain uncertainty.
It is buffer inventory that is kept to ensure that a company can continue to meet demand even if unexpected events occur, such as delays in deliveries or unexpected increases in demand.
The purpose of safety stock is to ensure that a company can continue to fulfill customer orders even if there are disruptions in the supply chain. It is calculated based on factors such as lead time, demand variability, and desired service level. By maintaining an appropriate level of safety stock, a company can reduce the risk of stockouts and ensure that it can meet customer demand even in the face of unexpected events.
Safety stock is an important component of inventory planning. When your brand calculates (and orders) the right amount of safety stock, it can help prevent stockouts, reduce lead times, and compensate for inaccurate demand forecasting.
The reality of stockouts is that they frustrate your customers and cause your brand to miss out on potential revenue opportunities. Thankfully, prioritizing safety stock is one of the best ways for DTC brands to avoid stockout situations altogether.
When your brand encounters low inventory levels, safety stock helps you continue selling as you wait for more inventory to arrive. In other words, safety stock allows you to keep fulfilling customer orders until you can fully restock your warehouse shelves.
Order lead time is the amount of time it takes to fulfill orders. That is, it’s the time (in days) from when an order is first placed until it’s ready for delivery.
Unfortunately, there are several disruptions on the supplier side — production issues, raw materials shortages, and so on — that can cause your lead times to drag on for longer than you’d like.
Incorporating safety stock into your inventory management helps reduce the effects of long lead times. With that buffer, you can keep selling even as you wait for more inventory to arrive. So, safety stock makes sure those interim periods aren’t really that big of a deal.
And if your brand uses buffer stock to protect against surges in demand, you can lean into placing smaller orders more frequently (further reducing your total lead times).
Even when you devote energy and attention to your inventory forecasts, sometimes they don’t turn out quite as accurate as you’d hoped. More specifically, you might see a surge in demand that your forecasts didn’t anticipate — meaning your stock levels suddenly take a dip.
Luckily, safety stock can help you make a quick pivot before you experience a stockout event. By leaning on your safety stock, you can keep order fulfillment consistent as you work on building your next forecasting estimates.
In many ways, customer satisfaction is built on trust. That is, customers can trust your brand to have what they need in stock and ready to ship when they need it. Plus, when customers can rely on your brand to have all their favorite products, they’re much more likely to remain loyal to your store.
With the help of safety stock, you don’t have to put up an out-of-stock message on your website when items start running low. Instead, you can continue selling from this buffer supply and continue to make your customers happy.
Safety stock ensures you don’t have to turn your customers away (or worse yet, accidentally turn them on to your competitors).
That’s because roughly 70% of apparel brands, for example, will recommend substitute products to try and save the sale when they don’t have safety stock on hand. According to the 800 consumers surveyed by Lucidworks, 76% of shoppers are happy to purchase an alternative item (though 69% also said they’d also do so with a competitor).
While brand image isn’t everything, it’s certainly an important factor in modern retail operations.
Inadequate product availability (like when you run out of stock) isn’t exactly a good way to earn your customers’ favor or improve your reputation among potential buyers.
Having a solid brand image will require you to keep a close eye on your inventory levels and pull out your safety stock as needed.
This way, shoppers know they can count on your brand time and time again. And they’re more likely to tell their friends and family about the amazing customer experience you’ve provided.
It’s no secret that a lack of inventory can impact your brand’s profits. But more than that, running out of stock can also lead to rushed delivery — which can get pretty expensive if your supplier charges a premium to expedite your shipment.
These expedited fees will undoubtedly impact your bottom line, seeing as increasing the costs of goods sold (COGS) consequently lowers your margins.
Thankfully, safety stock lives up to its name by safeguarding against these steep price fluctuations. Using your safety stock instead of paying for rush delivery will protect your brand’s bottom line and make sure you don’t waste working capital on an easily avoidable expense.
To calculate optimal safety stock, you need to multiply product sold per day by desired days of safety stock. This allows you to keep enough inventory on hand and avoid a stockout.
While there are also more complicated ways to calculate safety stock, this basic method accounts for the number of products your brand sells each day, and the number of days of stock you want to hold at any given time.
For example, say your DTC brand sells 200 products per day, and you’d like to keep 10 days’ worth of safety stock on hand. This calculation would look like: 200 (products) x 10 (days’ worth of stock). Here, your ideal safety stock level would be 2,000 units.
Although we’ve provided a way to perform basic calculations, safety stock isn’t limited to a single formula. Rather, there are multiple methods you can choose from depending on your needs or business structure.
The top 10 methods are explained below — and we’ve also included a key to help you solve these equations a little easier.
| Safety stock formula variable | What it stands for |
| Z | orders your brand expects to fulfill |
| σLT | standard deviation of lead time |
| D avg. | average demand for a product |
The standard deviation formula comes in handy when you have multiple uncertain variables within your inventory (like demand or lead time).
To calculate your safety stock this way, use the formula:
| safety stock = Z * σLT * D avg. |
In this equation, Z is the number of orders your brand expects to fulfill within a given time period (also known as your service level or service factor).
Next, σLT is the standard deviation of lead time. Since this can get a bit complex, many brands use an online calculator to determine the standard deviation of a data set. All you have to do is input the lead times for each purchase order within the given period.
Lastly, D avg is the average demand for a product within that given time period. More often than not, retailers will utilize their average daily demand. This is found by adding up the number of sales and dividing by the number of days in that time period.
Once you know the individual values for Z, σLT, and D avg, you can multiply these 3 variables to find your safety stock inventory.
The variable demand formula is well-suited for brands with reliable lead times but experience demand variability throughout the year (possibly due to seasonality).
To calculate your safety stock this way, use the formula:
| safety stock = (standard deviation of demand) * (square root of average delay) |
Similar to the standard deviation calculator linked above, there are online tools that can help you calculate the average and the square root of a set of numbers when needed.
To find your average delay, you’ll first need to find all the supplier orders that took longer than average to arrive. Then, add the total number of days past your average lead time and divide that sum by the total number of delayed orders.
The variable lead time formula is sort of the opposite of variable demand. This equation is used only when demand is stable, but your lead time varies.
To calculate your safety stock this way, use the formula:
| safety stock = Z * average sales * σLT |
As was true with the standard deviation formula, Z indicates your desired service level while σLT again represents the lead time deviation. Feel free to reference the first formula on this list for more information on calculating Z or σLT.
Economic order quantity (EOQ) is the ideal amount of inventory your brand should purchase to minimize its inventory costs. This quantity is especially useful for companies who want to lower their overhead costs related to ordering, transportation, and storage.
To calculate your safety stock this way, use the formula:
| EOQ = square root of [(2 * setup costs * demand rate) / holding costs] |
This EOQ calculation is sometimes referred to as the Wilson formula. With this formula, brands can reveal the least costly number of units to keep on hand as safety stock.
A reorder point (ROP) is the specific level where your inventory needs to be replenished. When products fall to their lowest acceptable amount (or the reorder point), you really can’t wait any longer to restock these items.
To calculate your safety stock this way, use the formula:
| reorder point = (average stock depletion * average lead time) + available safety stock |
With your ROP, you know the optimal time to reorder before you’re totally sold out. A strong reorder point is usually a little higher than your safety stock level, so you give yourself an extra buffer against supply chain disruptions.
Using time-based calculations, your brand can compute its safety stock levels based on future demand forecasts over a fixed time period. To perform these calculations, you’ll need:
Time-based safety stock is a good option for brands with steady demand and consistent product offerings.
With that said, this type of calculation doesn’t account for unpredictability in your supply chain. So, you’ll risk holding more inventory than you really need or not holding enough stock and encountering a stockout with this method.
Fixed safety stock is when companies create a set inventory level for each SKU. More simply, it’s a predetermined number of buffer units you keep for each individual SKU.
To calculate your safety stock this way, use the following formula:
| fixed safety stock = number of days * average daily usage = number of days * maximum daily usage |
Sometimes, fixed safety stock is based on your assumptions (or the intuition of your inventory management team). Meaning, this method doesn’t account for your lead times or demand fluctuations.
For that reason, fixed safety stock works best for retailers who experience consistent customer demand and very few supply chain disruptions.
Heizer & Render’s formula works well if there are big variations in your supplier’s schedule.
To calculate your safety stock this way, use the formula:
| safety stock = Z score * σLT |
A Z score refers to how much deviation there can be from the mean. When talking about safety stock, this score is the standard deviation above the mean demand needed to prevent a stockout. Typically, brands use 1.65 to ensure they can satisfy demand with a 95% confidence level.
The Heizer & Render’s safety stock method also incorporates the standard deviation of lead time distribution. This gives you a better idea of how often you deal with late shipments. However, you should know that this approach doesn’t consider changes in demand.
Greasley’s method is based on your supplier’s lead time and demand fluctuations. And it generates one of the most accurate calculations you can get.
To calculate your safety stock this way, use the formula:
| safety stock = Z score * standard deviation in lead time (σLT) * average demand (D avg) |
The great thing about Greasley’s formula is that it emphasizes the impact of demand variability — whether this is caused by seasonality, promotional tactics, and so on. Just keep in mind that this method doesn’t acknowledge stock while it’s in production and not yet ready for sale.
The average – max formula is best for brands who experience short lead times because it fails to account for long lead time variables. This method calculates the average maximum units you need at any time.
To calculate your safety stock this way, use the formula:
| safety stock = (maximum sales * maximum lead time) – (average daily sales * average lead time) |
Ideally, you’d use a data set collected over 12 months to determine these values.
Choosing the right safety stock formula will require you to consider a few different factors, like:
The basic safety stock formula is a good place to start if you’re unsure about the more advanced methods. Those basic calculations can give you a ballpark idea about how much safety stock you might need — especially when specific variables about your inventory and lead times are unknown.
For brands with the data needed to calculate those specific variables, the more complex formulas (like Greasley’s method) will likely pinpoint safety stock levels with greater accuracy and assurance.
It’s important to carefully calculate the amount of safety stock you need when you place an order with your supplier. If you mistakenly order extra stock, you’re likely to reduce available cash, increase your holding costs, and accumulate obsolete or spoiled SKUs.
Ordering too much safety stock can really hurt your cash flow. That’s because overordering is synonymous with overspending. When your company reduces its available cash, it can keep you from investing in new product planning, marketing strategies, and more.
That’s why it’s so necessary to find a stock formula that works well for your brand, so you can make smarter purchasing decisions and avoid overstocking any items.
The more inventory you store at your warehouse (and the longer it’s housed there), the more holding costs you’ll have to pay. Meaning, if you’re carrying more safety stock than you need, your holding costs will continue to compound the longer those products go unsold.
The best way to minimize your inventory holding costs is by making informed forecasts that accurately reflect demand and promote a healthy level of safety stock.
Obsolete inventory is often referred to as dead stock. In most cases, inventory becomes obsolete after a certain amount of time has passed (and the items remain unsold) or when a unit gets broken slash damaged during the warehousing process.
Unfortunately, the more safety stock you have sitting around, the greater the risk of these goods becoming obsolete. A prime example of this situation comes from LuLaRoe, whose overstocked leggings grew mold and became completely unsellable.
Along with becoming obsolete, a surplus of safety stock also runs the risk of spoiling. If your brand sells time-sensitive products, there’s a possibility any excess inventory will expire before it’s ever sold.
This spoilage leads to lost sales opportunities. Why? Because those products have to be disposed of and can no longer be sold (which also means producing a lot of extra waste).
And let’s face it, generating tons of unnecessary waste isn’t a good look for your brand. Take Burberry, for example, which got called out for burning their excess merchandise and causing a lot of harm to the environment.
As I said before, accurate safety stock levels are critical to your retail operations.
And while calculating safety stock can feel a bit daunting, Cogsy can help remove uncertainty from the equation. Thanks to real-time tracking, forecasting features, and replenishment alerts that is.
If you can’t see what your stock is doing, it’ll be hard to know how much you need to reorder. In that way, inventory visibility is integral to the growth and success of your online brand.
With Cogsy, retailers can track their stock levels in real-time, whenever they want. Its operations platform provides around-the-clock visibility into all your product movement, so you know exactly where your products are (or where they’re headed) at any given time.
Using these inventory insights, you can make smarter, more informed purchasing decisions for all your safety stock and replenishment needs.
Cogsy integrates your previous sales data, purchasing trends, and seasonal analysis into one convenient and comprehensive platform. With this information at your fingertips, it’s much easier to forecast actual demand and create operational plans around your inventory needs (including your safety stock).
On top of that, Cogy’s software is significantly more convenient to use than static spreadsheets. And it leaves a lot less room for forecasting errors or miscalculations.
Because Cogsy’s operations platform looks after your stock levels 24/7, it knows precisely when your inventory is running low and when it’s time to restock your warehouse.
In addition to collecting this data, Cogsy goes the extra mile by sending automatic replenish alerts for your entire product catalog. Not only do these low stock alerts optimize your purchasing workflows, but they help prevent stockouts at the same time.
What could be better than automated notifications telling you it’s time to reorder? Well, what about auto-filled POs for the exact amount of inventory and safety stock your brand needs?
That may sound too good to be true, but it’s entirely possible when you team up with Cogsy. With 1 click, Cogsy creates an optimized purchase order tailored to your unique inventory requirements — no spreadsheets, guesswork, or crunching numbers needed.
Backorders are a saving grace if and when stockouts occur, which can happen when launching a new product or even a new brand (since there’s no historical data for you to lean on).
With backorders, retailers can keep revenue flowing and keep customers happy since they can still follow through with their purchases.
With Cogsy, you can quickly pivot to selling on backorder and continue to convert demand as you wait on replenishment stock.
Ready to streamline and simplify your safety stock? Try Cogsy free for 14 days.
Safety stock is an important component of every product-based business. When your brand calculates (and orders) the right amount of safety stock, it can help to prevent stockouts, reduce lead times, and compensate for inaccurate demand forecasting.
How much safety stock your brand needs will largely depend on your order lead times and your customer demand. But most brands typically aim to carry roughly 7-14 days’ worth of inventory.
Safety stock is the extra inventory companies have on hand in case customer demand exceeds forecast projections or supply chain disruptions cause longer-than-usual lead times. Reorder point, on the other hand, is the predetermined inventory level (for each of your products) that signals it’s time to restock.
Buffer stock is specifically held for a sudden increase in demand, like when a promotional campaign brings in more business than anticipated. By contrast, safety stock can also be stored in case of supplier delays, like when there’s a shortage of raw materials. Despite this small difference, these 2 terms are often used interchangeably within the retail space.
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