Safety Stock: Safety Stock (Also Called Buffer Stock) Is A Term Used by
Safety Stock: Safety Stock (Also Called Buffer Stock) Is A Term Used by
Contents
The main goal of safety stocks is to absorb the variability of the customer demand. Indeed, the
Production Planning is based on a forecast, which is (by definition) different from the real
demand. By absorbing these variations, safety stock improves the customer service level.
By creating a safety stock, you will also prevent stock-outs from other variations :
Inventory policy
The size of the safety stock depends on the type of inventory policy that is in effect. An
inventory node is supplied from a "source" which fulfills orders for the considered product after
a certain replenishment lead time. In a periodic inventory policy the inventory level is checked
periodically (such as once a month) and an order is placed at that time as to meet the expected
demand until next order. In this case, the safety stock is calculated considering the demand and
supply variability risks during this period plus the replenishment lead time. If the inventory
policy is continuous policy (such as an Order point-Order Quantity policy or an Order PointOrder Up To policy) the inventory level is continuously monitored and orders are placed with
freedom of time. In this case, safety stock is calculated considering the risk of only the
replenishment lead time. If applied correctly, continuous inventory policies can lead to smaller
safety stock whilst ensuring higher service levels, in line with lean processes and more efficient
overall business management.
Example calculation
A commonly used approach calculates[6] the safety stock based on the following factors:
Demand rate: the amount of items consumed by customers, on average, per unit time.
Lead time: the delay between the time the reorder point (inventory level which initiates
an order[7]) is reached and renewed availability.
Service level: the desired probability that a chosen level of safety stock will not lead to a
stockout. Naturally, when the desired service level is increased, the required safety stock
increases as well.
Forecast error: an estimate of how far actual demand may be from forecasted demand.