Running a successful eCommerce business requires managing a vast array of variables, chief among them is inventory management. Having the right amount of safety stock in place – an additional backup measure to ensure your shelves are sufficiently restocked in case of unforeseen demand spikes – can lead to customer satisfaction and poor order fulfillment rates.
However, there is hope! Following some simple steps, you can develop a safety stock strategy that ensures on-time delivery and maximum customer satisfaction. This blog post will cover the basics of calculating eCommerce safety stock levels, so your eCommerce business can handle overstocking or running out!
What is safety stock?
Safety stock, or buffer stock, functions similarly to an emergency reserve. Suppose you sell more of a specific product than anticipated. In that case, your supply chain is interrupted, or your item needs to be fixed, and safety stock permits you to continue selling that product.
The most severe risk of not having a safety stock is a stockout.
Assume one of your popular goods is out of stock, and consumers continue to request it. This is a minor concern if your supplier’s lead time is low, meaning you may acquire new inventory in a few days.
However, if the lead time is already lengthy, that product may be unavailable for months. The same is true in the case of a supply chain issue, such as a material shortage. Stockouts drastically reduce customer trust and store performance without appropriate measures like BackOrder enabled.
Your safety stock protects you against unanticipated events.
How to calculate eCommerce safety stock levels
Safety stock formula
The most straightforward way is to utilize the following commonly used safety stock formula:
Safety stock = (Maximum daily consumption x maximum lead time) – (average daily usage x average lead time)
The variables in this formula are as follows:
- Maximum daily usage: the number of units sold in a single day.
- Maximum lead time: the amount of time it took your supplier to deliver the goods.
- Average daily usage: the number of units sold on a given day.
- Average lead time: the time it takes your supplier to deliver the inventory on average.
Fixed safety stock
Fixed safety stock refers to the number of units kept as safety stock for each item. Retailers utilize current sales figures to estimate the quantity of safety stock to keep on hand.
You may, for example, elect to preserve two weeks’ worth of safety stock for an item. It has a daily usage average of 10 and a daily usage maximum of 17. This product’s fixed safety stock would be between 140 and 238.
Heizer and Render’s formula
The following is the formula: Safety stock = Z score x standard deviation in lead time (σLT)
The ideal service factor in inventory management is the Z score—the number of standard deviations above mean demand required to prevent stockouts.
The standard deviation in lead time (LT) describes how frequently and to what extent your supplier’s average lead time departs from the actual lead time.
When your supplier’s lead time fluctuates but does not account for variations in client demand, Heizer and Render’s formula is suitable.
Time-based calculation
Based on future demand projections, time-based analysis allows you to compute eCommerce safety stock levels for a specified time period.
A time-based method requires two parameters:
- Previous statistics regarding product demand and sales, including units sold and items in short supply or out of stock. This information may be obtained via your point-of-sale (POS) system.
- Forecasted demand for the forthcoming season. To forecast future demand, you may utilize several demand forecastings methods such as trend projection, barometer methodology, and market research.
Greasley’s method
Greasley’s safety stock calculation takes into account your supplier’s lead time as well as changes in product demand:
Safety stock = Z score x standard deviation in lead time (σLT) x average demand (Davg)
Greasley’s technique extends Heizer and Render’s formula by include the average demand factor.
Safety stock with EOQ
The best product inventory to acquire is the economic order quantity (EOQ), which includes holding, shortfall, and order expenses. It may be used as a guide for your eCommerce safety stock levels.
EOQ = square root of (2 x setup costs per order x demand rate) / holding costs
In Conclusion
Holding just enough safety stock to stay away from either of these two extremes is the objective. This is possible with reliable data and the appropriate safety stock calculation. With many years of experience, we have strong tools and practices to help you calculate and manage your eCommerce safety stock levels. Contact us today!
