Calculating safety stock

A safety stock is necessary to prevent instances where demand exceeds your available stock (called overselling). It is good practice to keep a dynamic safety stock for your products, and especially for products that have higher margins as you don't want to miss out on potential sales from overselling.

Some of the methods of calculating safety stock can be found online, but the variables typically involve:

  • Lead times (unit of time it takes to restock your product)
  • Historical order volumes
  • SLA with your customers

We've provided two ways calculations below:

Multiply the standard deviation of your lead time by the average daily order volume, e.g. 

[std.dev.(lead.time)*avg.(orders)] = # stock required for unit of lead time

Calculate the difference between the worst overselling scenario (maximum order volume x maximum lead time) and the average scenario (average order volume multiplied by average lead time) 

[max.(orders*lead.time)]-[avg(orders*lead.time)]

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