How Do You Calculate Safety Stock and Reorder Points in Inventory Management? | Unleashed

Safety stock is stock that you hold as a buffer. The purpose of safety stock is simply to protect your business from delays in your supply chain. In a perfect world, you would never eat into it – it's there to cover you when the unexpected happens, and the stock you’ve ordered doesn’t turn up on time.

When we talk about not using your safety stock – we don’t mean you should have the same items sitting on your shelves forever. They'd get dusty, go past their use by date, and go to waste.

In reality, you’ll want to sell your oldest items first so that you do actually cycle through your safety stock and use it up. It’s just that ‘on paper’ there’ll be slightly more stock in your inventory than what you need in a given period – and that's your safety stock.

00:00 - 00:41 - How Do You Calculate Safety Stock and Reorder Points in Inventory Management?
00:41 - 01:24 - What is safety stock?
01:24 - 02:39 - Why is safety stock so important?
02:39 - 03:49 - How safety stock and reorder points work together
03:49 - 04:34 - Can safety stock be a bad thing?
04:34 - 06:13 - Why is everyone talking about safety stock right now?
06:13 - 07:28 - How to calculate safety stock
07:28 - 08:16 - How to calculate reorder points
08:16 - 09.09 - Using reorder points with inventory management software

How safety stock and reorder points work together

So that’s your safety stock – the amount of each product that you don’t actually want to use, but you have on hand just in case. And then you have reorder points, which tell you when to order more.

They’re closely related – and together they help your business run smoothly. Let’s look at an example. Say you have a particular kind of screw that you use to assemble furniture.

Your safety stock number for that screw might be 200, your reorder point might be 800 and let’s say you have 1000 left in your warehouse.

As you use up screws making tables and chairs the number remaining drops until it hits your reorder point – which is when you send a purchase order to your supplier for some more.

As they’re picking, packing and shipping your order – maybe even making it – you’re still using up screws. But luckily the new stock arrives before you run out because

Instead of relying on guesswork, you’ve used the proper reorder point formula to work out when to make that purchase – and because you’ve factored in some safety stock, to cover for any delays

How to calculate safety stock

So here we are, ready to calculate our safety stock and reorder point figures.

All we need is some fresh data on each stock item. We’ll use the example of screws used in a furniture factory – but you use the same process if you're dealing with completed products that you sell in a store.

So, we need to know

Our Maximum daily use as well as our Average daily use of that item

Plus our Maximum lead time in days, as well as our Average lead time for that item

And then we just plug those numbers into the formula. I like to use a calculator – this is a free one that we made at Unleashed

So with those screws we want to order – let’s say the most we’ve ever used in the factory is 100 in one day. And on average we go through 90

And let’s say once we order them, on average they take 5 days to arrive – but lately they’ve taken as long as 15 to turn up.

We just put those numbers into the formula – which is maximum daily use, times maximum lead time – minus average daily use times average lead time

And that gives us our safety stock figure - which in this case is 1,050 screws.

How to calculate reorder points

Now we take that Safety Stock number to our Reorder point formula. Again, there’s a calculator on that same page we were using, and we take the same data and calculate it slightly differently. This time we take our average daily use of 90 screws per day

Multiply it by that average lead time of 5 days – remember, that’s how long it takes for those screws to arrive and be ready to use, from when we first place the order. And then we add our safety stock figure of 1,050 screws, which gets us a reorder point of 1,500

So there we have it – we now know that, even if our order takes the longest it’s ever taken to arrive – we shouldn't run out if we place our order when there’s only 1,500 left in the warehouse.

Looking for the free inventory calculators shown in the video? You can find them here: https://www.unleashedsoftware.com/inv...

You can also learn more about out inventory management and inventory management techniques in our free inventory management guide: https://www.unleashedsoftware.com/inv...
And to learn more about Unleashed check out http://www.unleashedsoftware.com

Or watch detailed free demos of Unleashed here: https://www.unleashedsoftware.com/inv...

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