A Small Business Guide to Carrying Safety Stock Inventory

Every manufacturer should have enough safety stock to handle a surge of orders and suddenly increased lead times. This guide breaks down what safety stock is and how to calculate how much you need.

As a small commercial drone manufacturer, things are going great for you this week. A new marketing campaign is hitting the mark, and orders are flooding in. You've got a virtually unlimited supply of almost all the parts except for one circuit board, but no worries. You think you've got enough extra to -- and then they're gone.

Suddenly, everything grinds to a halt. Now you've got orders you can't fill and workers who can't work. Disaster!

What comes next is painful. You pause all orders and pay through the nose to a supplier to get the parts shipped to you within days. Eventually, customers start contacting you, but they’re angry at the delay, and some are even canceling orders. Your great week has turned into a mess, and you wonder what you did wrong and how to keep it from happening again.

The problem is that you didn't have adequate safety stock to prepare you for a sudden surge in orders. It's a common mistake in manufacturing -- and one you can avoid through proper planning. This guide will help you properly calculate what and how much safety stock your business needs.

Overview: What is safety stock?

Safety stock refers to the extra parts, materials, or products a manufacturer keeps on hand to make sure they don't run out of something they need -- leading to significant delays in making or shipping the product.

Keeping enough safety stock on hand is one of the most important types of inventory management techniques, and it ensures that a business can continue to manufacture products without worrying about a major interruption.

However, manufacturers must carefully balance a need for safety stock with the costs of keeping the stock on hand. If a manufacturer keeps too much safety stock, the firm may incur more in inventory costs than necessary.

5 ways safety stock helps with inventory management

These five benefits show just how critical safety stock is to effectively running a manufacturing company.

1. It ensures necessary materials are always available

A manufacturer needs certain materials and parts to produce a unit. If those materials aren’t available when it comes time to produce the unit, the manufacturer must halt production and acquire those parts from a supplier, which may take days and delay the final delivery. The manufacturer may also have to pay extra to rush shipment of the order or purchase the materials at a time when prices are at a peak.

2. It keeps the business running smoothly

Safety stock doesn’t just keep an individual order on track -- it’s also vital for the functioning of a healthy business. A manufacturer constantly beset by delays caused by stock shortages is in a state of constant chaos. Problems with one order cause ripple effects to other orders and consequently make it more difficult to run the business. Safety stock makes sure all orders can proceed without interruption so the manager can focus on other important tasks to keep the business running at top efficiency.

3. It makes it easier to budget

Accurate budgeting is tough enough, but it's nearly impossible when constant interruptions throw a wrench into your job costing estimates. By keeping safety stock and ensuring your orders progress on schedule, it will be easier to create an accurate budget.

4. It allows you to handle other crises

By averting one type of crisis with safety stock, you can focus on mitigating other inventory control crises. For example, if you miscalculated how popular a product would be and find that your stock is rapidly declining, you have the space to order parts before the safety stock is depleted. You can also adjust your target safety stock levels to handle the new reality of more orders going forward.

5. It keeps customers satisfied

If you're constantly running into delays due to stock depletion, your customers will have to wait longer than expected for their orders -- and, as you know, it's not a good idea to keep customers waiting. Safety stock will guarantee timely delivery of orders, and therefore customers are more likely to stick with you than to bolt to a manufacturer who does a better job of consistently delivering on orders.

How to calculate safety stock for your business

Where do you even begin with calculating safety stock? You must know four things: your maximum weekly output, your average weekly output, your maximum lead time, and your average lead time.

The safety stock formula

The emergency inventory formula is simple. You want your safety stock supply to be the difference between your average weekly production with normal lead time and your maximum weekly production combined with the longest possible lead time. Then even if you’re hit with a large surge in orders while dealing with an inflated lead time, you can handle it.

Multiply the maximum weekly production by the maximum lead time for Result A and then multiply average weekly production by the average lead time for Result B. Then subtract Result B from Result A, and you have your safety stock target.

For example, if you produce 200 widgets per week on average and there's a 10-day average lead time -- but sometimes the lead time is 20 days, and on busy weeks you produce up to 350 widgets -- then the safety stock equation would look like this:

(350 x 20) - (200 x 10) = 5,000

You would need 5,000 widgets of safety stock to be sure you’re adequately prepared in case you’re hit with both a busy week and longer lead times. Remember, you must immediately replenish the safety stock as soon as you drop below this figure because you never know when it could happen again.

FAQs

• What are the consequences of not having enough safety stock?

  Not having enough safety stock will result in delays and cost increases as you halt a job until the stock can be replenished, leading to lost profits. You also may pay extra for rush shipping or for less-than-ideal material prices, and you may lose customers who are frustrated at receiving their orders late.

• What are the consequences of having too much safety stock?

  Since it costs money to keep items in storage, ordering too much safety stock will cause you to spend too much on inventory management. This will hurt your bottom line. That's why proper planning is essential to hit the sweet spot for safety stock since it’s possible to have either too much or too little.

• How do I know which parts/materials to keep on hand?

  You should be keeping data on your parts and materials usage. If you're not, it's time to start because figuring out which parts to have on hand is guesswork without data. Inventory management software will collect data that will tell you exactly how much safety stock for each part you'll need, and the lead time you've calculated will tell you when to place the order so it's available when you need it.

Software will simplify safety stock management

The best way to manage your safety stock is with inventory management software. Spreadsheets simply aren't enough to handle the needs of most manufacturers, and you can find plenty of cost-effective options if you're worried about price.

These platforms handle all aspects of inventory management such as asset tracking, warehouse organization, product identification, inventory costing, calculation of carrying costs, and much more.

If you aren't using inventory management software now, or are not satisfied with the one you have, give a few options a try and see which one best fits your business. You'll be surprised at how big the impact can be on how you run your business and, ultimately, on your bottom line.