As a result of the sharpening of competition in different markets, businesses have started to use different methods to continue their existence and increase their profitability. Storage, which is one of the main fields of activity of businesses, gained a different dimension. While it was considered beneficial to mass storage and keep the warehouses full in previous years, this situation has been completely reversed today.

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Businesses have started to try different ways to keep extra products in their hands and to minimize the cost of storage. Keeping the product in the warehouse in an amount that will meet the demand and ensuring continuous flow has become the basic practice of this era. However, since the market is a shifting environment, the supply and demand balances are constantly changing. During these changes, businesses resort to a method called safety stock so that they can continue to put products on the market. The question of how to calculate safety stock has a rather complex and troublesome answer.

What Is Safety Stock?

The safety stock is a measure that an enterprise that constantly supplies to a market, does not stop applying products in case of unexpected situations that may occur in the market. Safety stock has an important place for businesses. Therefore, the question of how to calculate safety stock is one of the most sought-after questions. Going through a business example is useful for a better understanding of the subject.

Stock Inventory at Plant

Assuming that a company has a product sales figure of 100 units per day, and if the order is placed, the arrival time of new products to the warehouse is 5 days, and the amount of products that the company should keep in its warehouse is 500 units. However, due to the conditions such as the troubles that may occur in the logistics chain, and the sudden increases in demand, the company stocks can be exhausted in a short time and there may be problems in putting products to the market. In order not to face such problems, companies have a certain amount of safety stock. In other words, in addition to the 500 units needed, it keeps a certain amount of more products in the warehouse.

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Why Use The Safety Stock Formula?

The question of how to calculate safety stock has different answers. The most used among these is to determine random safety stocks. However, since this has no scientific basis, it cannot always be expected to give correct results. In determining random safety stocks, business owners or managers order extra products according to their wishes without any calculations.

Woman warehouse worker with tablet.

If you go over the above example, in addition to the need for 500 units, more than 100 units are ordered. However, since there is no data on whether a need of 100 units will arise, these additional 100 units may remain. The most accurate answer to the question of how to calculate safety stock can be obtained by using the safety stock formula. With this calculation based on concrete business data, the possibility of determining a more accurate safety stock is revealed.

3 Ways to Calculate Safety Stock with Formulas

Pensive office worker accounting in the evening

There are many methods and formulas that can be given in answer to the question of how to calculate safety stock. Thanks to these formulas, which are completely based on rational data, it is possible to accurately determine. Some of the issues that can be used in this direction are:

  • Determining Safety Stock from Demand: One of the most effective methods for determining stock is the method of determining safety stock on demand. In this method, the deviation between the expected demand and the actual demand is determined. The time required for renewal of the stock, that is, the time required for the orders to reach the warehouse, is determined that what percentage of the demand, which will occur, will be directly supplied from the stock.

Today, this figure is around 90 to 95 percent, and businesses are making efforts to increase it to 100 percent. The coefficient corresponding to this determined ratio is found in the safety stock calculation table. It is possible to calculate with the coefficient obtained from this table, which can be easily found on the Internet. In the last stage, it is determined by multiplying the value obtained by summing the deviation amounts and dividing it by the number of days and the coefficient obtained from the table.

  • Accounting for Lead Time: Another method used in determining the stock is to calculate the supply time. The time between placing an order for a product and the start of production and the delivery of the order by completing the production is called the delivery time. What is this period? It is one of the methods used to calculate the stock correctly.
  • Reducing the Need for Safety Stock: It is a necessary condition for businesses selling products from stock. However, in order to minimize storage costs, it is necessary to minimize the need for safety stock. To do this, to stabilize logistics processes and customer needs. and it is necessary to minimize uncertainties. Profitability for an enterprise is not only derived from income from product sales. It is also possible to earn money by reducing unnecessary costs. Therefore, the cost spent on storage should be kept to a minimum.
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