The Role of "Safety Stock" in a Supply Chain

Safety stock is inventory carried for the purpose of satisfying demand that exceeds forecasted demand for any given planning period. Firms carry safety stock because demand forecasts are always uncertain (read - wrong) and shortage or stockouts can occur if demand exceeds forecast demand. The balance that a supply chain manager must consider is the actual quantity of safety stock - a higher level increases product availability and revenues from sales, but increases inventory holding costs in the supply chain. Holding costs of safety stock are increased significantly when product obsolescence, or product shelf life factors are involved.

When determining levels of safety stock, consideration should be given to not only the level of safety inventory- by SKU, to carry but what actions can we take to improve product availability while minimizing safety stock. Levels of safety stock are typically determined by the uncertainty of demand - or supply, and the desired level of product availability to hit customer service targets. We find that every and all efforts to improve demand forecasting are typically worthwhile financially.

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