How can you set safety stock levels in your warehouse?

1 Understand your demand variability

The first step is to analyze your historical sales data and identify how much your demand fluctuates over time. You can use different methods to measure demand variability, such as standard deviation, coefficient of variation, or mean absolute deviation. Demand variability depends on factors like seasonality, trends, promotions, and customer behavior. The higher the demand variability, the more safety stock you need to cover the potential gaps between your forecast and actual sales.

2 Estimate your lead time and service level

The next step is to estimate how long it takes for your suppliers to deliver your orders and how often you want to avoid stockouts. Lead time is the time between placing an order and receiving it in your warehouse. Service level is the percentage of orders that you can fulfill without running out of stock. Lead time and service level affect your safety stock levels because they determine how much buffer inventory you need to maintain between replenishment cycles. The longer the lead time and the higher the service level, the more safety stock you need to ensure availability.

3 Calculate your safety stock formula

The third step is to use a formula to calculate your safety stock levels based on your demand variability, lead time, and service level. There are different formulas you can use, but one of the most common ones is:

Safety stock = (Z-score x standard deviation of demand x square root of lead time) - (average demand x lead time)

Z-score is a statistical value that represents how many standard deviations away from the mean you want to set your safety stock level. It depends on your service level and can be found in a Z-table. For example, if you want a 95% service level, your Z-score is 1.65.

Standard deviation of demand is the measure of demand variability that you calculated in the first step.

Average demand is the average number of units sold per day or per week.

Lead time is the number of days or weeks it takes for your orders to arrive in your warehouse.

You can use this formula to calculate your safety stock levels for each product or product category in your warehouse. You can also use a spreadsheet or an inventory management software to automate the calculation.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?