How to calculate safety stock

Safety stock is the extra product that you should have in your warehouse to prepare for any unforeseen market events, such as a problem with production or an increase in product demand caused by forces beyond your control. No matter what, you must have excess stock on hand that will allow you to comfortably get through these rough patches while at the same time, not creating an accumulated burden in the long term. So, how can you calculate the safety stock that you’ll need in your eCommerce business?

What’s the formula for calculating safety stock?

To cover extra demand for a product, the store needs to take into account the maximum time period the supplier guarantees in case of delay and the usual demand for the product in the market.

Safety stock = (Maximum period guaranteed – Normal delivery time) x Average product demand

The safety stock is, therefore, your way to guarantee that you can continue delivering products to your clients during the time it takes your supplier to restock your warehouse, thus maintaining your competitiveness against your competition.

When calculating the safety stock for your eCommerce business, you need to consider the possible reasons you might need to use it. So, for example, it’s essential to know how long your supplier could take to restock if there’s excessive demand as well as the timeframe you’ll have to return the items if they remain unsold.

Having this data on hand is highly important for any online store, both for sales predictions as well as for this safety stock calculation. How can you do this correctly and accurately for each product line in your store? By using catalogue and stock software that lets you know the sales for each product and category arranged by the time of year. This will allow you to adjust the safety stock in your eCommerce store for each department. 

Why is it important to calculate the safety stock well?

Having enough safety stock on hand for your business is essential, as we said before, to prevent the collapse of your online store in the case of unforeseen events. These don’t always have to be negative events since high demand can also cause this to happen. In this case, you’d be missing out on the profits from this great sales opportunity. 

Let’s list the three main advantages of having well-calculated safety stock: 

1. Maintaining your sales levels when the supply chain is damaged at any point, avoiding lost sales.
2. Saving on logistics and warehouse costs by not storing more product than necessary.
3. Preventing the existence of dead stock, unsold or poorly sold during sales, for the same reason.

How to efficiently manage your safety stock

Once you’ve calculated the safety stock for all areas in your eCommerce business, it’s important to keep this calculation up to date with the necessary reserves in your warehouse. This is where the final key to success in the management of safety stock lies. 

Would you like some tips on maintaining your safety stock?

1. Always check how your competition manages their stock to position yourself in the optimal market value between demand and availability.
2. Adapt the safety stock to the season since you won’t always need the same percentage of a product. With the help of the average demand calculation, you’ll have no problem adapting.
3. Take into account any changes in trends or brand imaging so that you don’t accumulate obsolete versions of any products.
4. When dealing with perishable products or sales caps (as can happen with perfumery products), make sure that you rotate the items in your safety stock. Ensure that you have the appropriate quantity on hand as well as the correct flow.
5. If, for any reason, you find yourself stuck with dead stock because of safety stock, provide an outlet for the stagnant products in your eCommerce business through upselling or by improving their visibility in your online store.

Finally, to speed up the management of your safety stock, there can be no doubt that having good catalogue and stock management software is essential. Thanks to this kind of tool, you’ll be able to have a visual summary of the stock in your eCommerce store as well as the sales curve. Constantly monitoring these alongside your pricing strategy will unify all aspects of your sales strategy.