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.
Why it matters
Setting the right safety stock level ensures you can meet customer demand without overstocking. It protects you from supply delays, demand spikes, and unexpected events — while avoiding unnecessary storage costs and tied-up cash.
Factors to consider
When determining your ideal safety stock level, review the following:
Estimated future demand — Forecast expected sales based on trends and historical data.
Delivery times to customers — Keep inventory levels as low as possible while still meeting promised delivery dates.
Material needs for production — Ensure enough materials are on hand to avoid production delays, even if you don’t hold finished goods in stock.
Lead times and variability — Factor in both average and possible delays in purchasing and manufacturing.
Cash flow impact — Remember that excess inventory increases storage costs, risk of obsolescence, and ties up working capital.
Common causes of safety stock needs
Safety stock protects against:
Supplier failures
Missed manufacturing targets
Seasonal demand changes
Large, unexpected orders
Tip for Make-to-Order businesses
In a Make-to-Order (MTO) setup, safety stock for finished products is usually set to 0, as you don’t store products before orders.
However, we recommend setting safety stock for materials to ensure uninterrupted production.
Bottom line: The right safety stock level strikes a balance — enough to cover supply and demand fluctuations, but not so much that it strains your storage space or finances.
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