Operations
Safety stock
Extra inventory held to protect against demand spikes or late deliveries.
Last reviewedWhat does Safety stock mean?
Safety stock is inventory kept on top of expected demand, so a business does not run out when demand is higher than forecast or a delivery is late. More safety stock gives a higher service level but ties up more cash and raises the risk of waste. A common formula, when lead time is fixed, is: safety stock = z x standard deviation of daily demand x square root of lead time in days, where z sets the target service level (about 1.65 for 95 percent). Example: daily demand has a standard deviation of 20 units and lead time is 9 days, so safety stock = 1.65 x 20 x 3 = 99 units. The reorder point is average demand over the lead time plus safety stock.
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Related terms
- Service level (fill rate and OTIF)How reliably a supplier delivers what was ordered, measured by fill rate and on time in full.
- Lead timeThe time from placing an order to receiving it.
- Working capitalCash tied up in running the business day to day.
- Bullwhip effectSmall changes in shopper demand grow into large swings in orders further up the supply chain.
- BottleneckThe slowest step, which limits the output of the whole process.
- Capacity utilizationActual output as a share of the most that could be produced.
- Little's lawItems in a system = arrival rate × time each item spends in it.
- Inventory turnoverHow many times stock is sold and replaced in a year.