What is safety stock, and how much should you keep?

The answer

Safety stock is the extra stock you keep on top of what you expect to sell while waiting for a delivery, so a busy day or a late supplier does not empty the shelf. The simplest way to set it is in days: safety stock = average daily sales × the number of extra days you want to cover.

Safety stock is a buffer, not part of your normal selling stock. Ideally you never touch it: a new delivery arrives just as stock falls to the safety level. It is there for the days when that does not happen.

The formula

Safety stock is one part of the reorder point, the level at which you place the next order. Without it, you would reorder only just in time and run out whenever sales were above average.

A worked example

A grocery shop sells an average of 20 one-kilo packs of sugar a day. The supplier delivers 3 days after an order. The owner decides to keep 3 days of safety stock, because the supplier is sometimes late.

• Safety stock: 20 × 3 = 60 packs
• Stock needed during the lead time: 20 × 3 = 60 packs
• Reorder point: 60 + 60 = 120 packs

When stock falls to 120, the owner orders. If the delivery arrives on time, about 60 packs are still on the shelf. If it is a day late, or sales jump to 30 a day, the buffer covers the gap. You can try your own numbers in the reorder point calculator.

How much should you keep?

There is no single right number. Hold more safety stock when:

• Sales swing a lot from day to day or week to week
• The supplier is unreliable or the lead time is long
• Running out is costly, because customers expect you always to have the item and will go elsewhere

Hold less, or none, when the item is slow-selling, expensive to hold, close to expiry or easy to get at short notice. For perishable goods, safety stock must never be so large that it expires before it sells.

A practical starting point is 2 to 3 days of sales for fast sellers with a dependable supplier, adjusted after you see how often you dip into it. If you never touch the buffer for months, it may be too large; if you run out regularly, it is too small.

Common mistakes

• Setting it once and forgetting it. Before festivals and seasons, daily sales rise, so the same number of days means more units.
• Using it for everything. Slow, low-value items rarely need a buffer; that money is better spent on fast sellers.
• Counting stock on order as safety stock. The buffer is what is physically on the shelf.

Keeping safety stock in a separate box does not help either. It is a number in your plan, not a separate pile; rotate it with the rest of your stock, oldest first. See also safety stock in the glossary.

Related questions

• What is FIFO in inventory?FIFO stands for first in, first out. On the shelf, it means selling the oldest stock before newer stock. In accounts, it means assuming the units you …
• How much stock should a shop keep?Enough of each item to cover sales until the next delivery arrives, plus a small safety buffer, and no more than one order’s worth on top. For each im…
• What is dead stock, and what should you do with it?Dead stock is stock that has not sold for a long time and is unlikely to sell at its normal price, such as last season’s sizes, discontinued models or…

General information, not legal, tax or financial advice. Published by Chameron Digital.