Operations
Safety stock
Extra inventory held to protect against demand spikes or late deliveries.
Facts checked against sources onWhat 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.
Where does it come up in case interview prep?
- Supply chains explainedLesson in How industries work: the toolkit
- Inventory and the cost of holding itLesson in Sourcing, trade and supply risk
- Supplier concentration and resilienceLesson in Sourcing, trade and supply risk
- Using this in a caseLesson in Sourcing, trade and supply risk
- Lean basics as economics: waste, flow, and the hidden cost of inventoryLesson in Making operations better, and planning for what can go wrong
- Logistics economics and operations: voyages, rerouting, warehouses and the last mileLesson in Logistics, shipping, ports and supply-chain services
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.
Learn it in context
See Safety stock at work in a lesson from How industries work: the toolkit, with checks as you go.
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