Safety Stock Calculation
Also known as: Buffer Stock Calculation, Safety Inventory, Safety Stock Formula
Definition
Safety stock calculation determines the optimal buffer inventory to hold to protect against uncertainty in demand and supply. The right amount balances stockout risk against the cost of carrying extra inventory.
Basic Safety Stock Formula
Safety Stock = Z × σd × √L
Where:
- Z = Service level factor (from Z-table)
- σd = Standard deviation of daily demand
- L = Lead time in days
Service Level Z-Values
| Service Level | Z-Value |
|---|---|
| 90% | 1.28 |
| 95% | 1.65 |
| 97% | 1.88 |
| 99% | 2.33 |
| 99.9% | 3.09 |
Safety Stock Calculation Example
Given:
- Average daily demand: 100 units
- Standard deviation of demand: 20 units
- Lead time: 9 days
- Desired service level: 95% (Z = 1.65)
Safety Stock = 1.65 × 20 × √9 = 1.65 × 20 × 3 = 99 units
Advanced Formulas
With Lead Time Variability
SS = Z × √(L × σd² + D² × σL²)
Where:
- σL = Standard deviation of lead time
- D = Average daily demand
King’s Formula (Simple)
SS = Z × σd × √(L + Review Period)
Factors Affecting Safety Stock
| Higher Safety Stock | Lower Safety Stock |
|---|---|
| High demand variability | Stable demand |
| Long lead times | Short lead times |
| Unreliable suppliers | Reliable suppliers |
| High service requirements | Lower service targets |
| High stockout cost | Low stockout cost |
Safety Stock Trade-offs
| Lower Safety Stock | Higher Safety Stock |
|---|---|
| Lower carrying cost | Higher carrying cost |
| More stockouts | Fewer stockouts |
| Less cash tied up | More cash tied up |
| Higher service risk | Lower service risk |
Best Practices
- Calculate by SKU (not averages)
- Review and adjust regularly
- Consider lead time variability
- Account for demand seasonality
- Balance with service level targets
- Use historical data for inputs
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