What is safety stock and how is it calculated

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Accepted Answer

Safety stock is the extra inventory held to mitigate the risk of stockouts due to unexpected demand or supply chain disruptions.

Safety stock is calculated based on the lead time to replenish inventory and the variability of demand during that lead time.
It is typically expressed as a number of units or as a percentage of average demand.
The formula for safety stock is: Safety Stock = (Z-score x Standard Deviation of Demand during Lead Time x Average Lead Time) + Buffer Stock
Buffer stock is an additional quantity of inventory held to account for any uncertainties in the demand or supply chain.
For example, if a company has an average demand of 100 units per week and a lead time of 2 weeks, and wants a 95% service level, the safety stock would be calculated as: Safety Stock = (1.65 x 20 x 2) + Buffer Stock
The buffer stock can be determined based on the company's risk tolerance and the cost of holding inventory.
Safety stock is an important concept in inventory management as it helps ensure that a company can meet customer demand even in the face of unexpected events.

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