Safety stock in the supply chain

By Timothy Welch, Managing Director, Demand Solutions (Europe) Ltd.

You can greatly increase your chances of consistently meeting your customer service levels and having your product available when and where it is needed by holding safety stock, but many factors can get in the way, such as inaccurate forecasting, transportation delays and inclement weather.

These factors can impact your available stock levels, but the accuracy of the demand forecast has by far the biggest impact on your ability to satisfy demand.

The task of forecasting is inherently challenging. Companies will continue to hold safety stock to provide a buffer between what you plan and reality.

Holding Safety Stock: Costs -v- Benefits

Companies who hold extraordinary quantities of safety stock to meet customer service level targets will improve service levels but there is a problem with this approach - safety stock is not free.

This cost varies from one organisation to the next. Academic studies estimate inventory carrying costs at 20-40%. This is not a one-time investment but rather an annual and recurring cost.

Cost is high as you are dealing with the warehouse space, people, insurance, shrinkage and obsolescence — not to mention the cost of borrowing which for most businesses remains much higher than current rate of savings.

The higher the customer service level you aim for, the more inventory you will need to carry and the more cost you will incur. If you had unlimited budget to devote to safety stock, you could achieve perfect customer service. For every £1 million in excess inventory you carry, it costs your business £200,000-£400,000 per year and with most businesses holding tens or even hundreds of millions of pounds of excess inventory, the costs are staggering, as is the opportunity.

Download our white paper to learn some of the techniques that can be used to address this problem as well as other common inventory mistakes.