Determining the appropriate level for safety stock involves considering future demand, manufacturing and delivery lead times, and financial constraints. This process ensures optimal stock levels to prevent overstocking while avoiding shortages, using a formula that factors in average daily usage, lead times, and safety stock for precision.
Safety stock levels are used to protect a business against spikes in demand or shortages in supply. These could be caused by things such as supplier failures, missing manufacturing targets, seasonality, or unexpected large order. Read more about what safety stock level is.
In general, when choosing a level for safety stock, you need to think about the following aspects:
Estimated future demand for a product
Delivery times you want to provide customers. Try to keep inventory levels at the minimum possible to better ensure delivery times.
The level for materials depends on the products you manufacture. Keep enough material stocked to ensure a smooth production process without delays related to unavailable stock.
Purchasing and manufacturing lead times, as well as possible fluctuations from averages
Cash flow capabilities. Excess inventory comes at a cost and means that you have money tied up in your warehouse.
Tip: In Make-to-Order situations, the safety stock should be kept at zero for products as you don't keep products them stock. However, we recommend using safety stock for materials to satisfy manufacturing needs even when using a Make-to-Order approach for products.
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