# What is Safety Stock & Safety Stock Calculation Formula

Safety stock describes the amount of inventory a business keeps in the warehouse to protect against spikes in demand or shortages in supply. From a perspective of a manufacturer, safety stock principles can and should be applied for both raw materials guide and final products to ensure availability of input for production, and goods for delivery. Most manufacturers employ some kind of minimum inventory principles.

In a perfect world, your suppliers always deliver on time and your sales does not fluctuate unexpectedly. So, your company would never run out of stock. In reality, your suppliers run into delivery problems due to various one-off events. From time to time you fail to meet your weekly manufacturing targets and your sales is affected by seasonal effects and unexpected marketing successes or failures. Also, sometimes unexpected spikes in demand are difficult to forecast. Supply chain is full of surprises. Due to this uncertainty, having some stock in reserve helps you keep your customers satisfied.

Yet, safety stock comes at a cost. Lean manufacturing principles guide you to eliminate waste, and excessive stock is a waste as there are many costs to holding excess inventory. Examples include renting additional warehouse space, paying salary to people handling the stock, the risk of stock expiring or becoming outdated, and much more. Also, excess inventory means your cash is tied up. Thus, every manufacturer needs to find a good balance between having enough safety stock to weather the storms, but not so much that it would break your bank.

Below is an example of a monthly sales cycle of a company where the safety stock helps to mitigate spikes in sales. But how to calculate that optimal level?

What is Safety Stock?

### How to calculate safety stock level?

The calculation is easy in case you have reliable purchase and sales order history available.

Safety Stock = (Maximum Daily Usage x Maximum Lead Time Days) - (Average Daily Usage x Average Lead Time Days)

Let's say there is a hidden workshop on a distant asteroid producing and selling hand-crafted Jedi Lightsabers to customers across the galaxy. Forging a lightsaber is a complex process that requires number of rare components as well as the ability to master Force. One key component of a lightsaber is a kyber crystal that powers the plasma blade. Every lightsaber needs one. Let's assume the workshop operates with the following characteristics:

• The production on average consumes 10 packs of kyber crystals per day to produce 10 lightsabers, but, maximum production capacity allows to consume 14 kyber crystals

• It takes on average 14 days for kyber crystals to arrive from a kyber crystal mine on a far away planet once the purchase order is placed, however, historical data reveals that delays in supply (read: Sith supply raiding parties) occasionally push the lead time up to 21 days

• It takes on average 5 days to produce one lightsaber, however, blockages in production (read: Jedi swordmasters called on a mission) sometimes result in a 10-day production cycle

• On average 10 lightsabers are sold per day, however, demand peaks (read: school starts in Jedi Academy) occasionally push the daily sales volume to 30 lightsabers per day

Table below sums it up nicely.

 Kyber crystal Lightsaber Maximum Daily Usage 14 30 Maximum Lead Time Days 21 10 Average Daily Usage 10 10 Average Lead Time Days 14 5 Total 154 250

Safety stock level for kyber crystals would be (14 x 21) - (10 x 14) = 154 units and for lightsabers (30 x 10) - (10 x 5) = 250 units. As the manufacturing process consumes on average 10 crystals per day then the workshop has a bit more than two weeks of raw material inventory available to guard against the unexpected. As the workshop sells on average 10 lightsabers per day then the workshop has a bit less than one month of ready-made product inventory available to weather unexpected occurrences.

When calculating safety stock levels pay attention to changes in underlying metrics. Maximum daily usage and average daily usage are not figures carved in stone. They increase as your business grows and they fluctuate depending on whether you are approaching high season or low season. Thus, you should recalculate your safety stock levels from time to time. A good tip to follow would be to revisit these calculations in every 3-4 months.

So now you know how much safety stock you need to keep in your warehouse readily available and so do the Jedi Swordmasters working on that distant asteroid. Having a sufficient safety stock of lightsabers is a life-and-death question for them. I mean, you would not want an angry-looking Force-sensitive Jedi banging on your factory door inquiring about a late delivery, would you?