Every customer appreciates availability, whether for products or services, right? After all, there's nothing more frustrating than arriving at a store desperately needing a particular item and hearing the phrase, "We're all sold out." To avoid such situations, having a safety stock is essential.
This concept is what separates a reliable store from one where the consumer doesn't know if their needs will be met. In this article, we'll explain the meaning of safety stock, its importance, and how to calculate it. Enjoy reading!
Safety stock represents an extra quantity of products or materials that a company reserves to ensure the fluidity of its operations and the maintenance of sales volume in unforeseen scenarios.
By reinforcing the initial stock, this reserve acts as a guarantee, so that your business is able to meet additional demand or compensate for any delays in receiving new supplies.
It's important to understand that the concepts of safety stock and minimum stock aren't the same thing. The former relates to the additional products you need to have in your store, while the latter is more related to the minimum stock quantity.
For example, if a store typically sells about 30 steel sheets per week, that's the minimum quantity it needs to meet current demand. If it has 50 of these items in stock, it guarantees the opportunity to increase sales during that period.
After all, new customers can emerge due to different factors: word-of-mouth marketing by satisfied customers, discovery of your store through social media, attractive promotions, among others.
By maintaining a safety stock, your iron and steel store maintains operational continuity, prevents stockouts, strengthens customer relationships, and improves your market reputation. Learn more about each of these points!
One of the main advantages of maintain a safety stock is to ensure the continuity of operations. This strategic reserve, which complements the minimum amount you need to have in your storage, offers a significant competitive advantage.
This is because safety stock allows the company to meet customer demand continuously, even when there are market fluctuations or problems with supplier deliveries.
To emphasize the importance of safety stock, it's worth relating it to another concept: stockout, which is the lack of a product at the moment a customer comes to buy it.
It's crucial to prevent this situation, as it leads to a drop in sales and negatively impacts loyalty. After all, the consumer will likely look for the item at a competitor—and may not even return to your store.
By avoiding product shortages, you strengthen trust with your customers, strengthen long-term relationships with them, and position yourself as a safe option compared to competitors who may face supply disruptions.
Safety stock should not be seen as a cost, but rather as an investment in quality standards and a tool you use to build a strong image in the market.
The main function of safety stock is to prevent lost sales due to product shortages, a situation that not only impacts immediate profits but also hinders customer acquisition and loyalty. Consequently, maintaining safety stock is important to achieve the following results:
All of these factors will contribute to smoother operations, higher-quality products and services, and, consequently, an increasingly strong reputation in the market.
Calculating the ideal safety stock level depends on a formula that considers a set of factors related to your business.
The formula for calculating safety stock is simple:
Safety stock = average sales per day × delivery time (also daily)
Let's take an example to illustrate: imagine a store that sells, on average, 5 steel sheets daily. If the average time for replacement of this material is 10 calendar days, the calculation of the safety stock would be:
Safety stock = 5 pieces per day × 10 days = 50 pieces
This means the store must keep more than 50 items in stock to ensure there are no shortages during the replenishment period. Because the formula is easy to use, you can apply it to other types of products and services.
Below, learn about the factors that are part of assessing the safety stock required for your operation.
Supplier delivery times have a direct and proportional impact on safety stock. The longer this period, the greater the amount of extra inventory required to avoid product shortages while awaiting replenishment. This time is represented in the formula as "delivery time."
Demand also influences safety stock. However, unlike delivery time, demand is variable. This fluctuation must be considered when establishing the "average sales," which must include potential demand.
A common strategy for forecasting demand is to analyze order history, calculating average sales from previous periods as a benchmark. Additionally, it's important to consider the seasonality in sales, in order to adjust projections for peak demand in specific months.
Products with higher output require greater availability and may experience more pronounced fluctuations in demand. This translates into a need to maintain a larger safety stock.
As you saw in this article, safety stock is a indicator very relevant to optimize the managing your inventory and improve your business's reputation. So, to avoid losing customers to the competition and ensure a continuous supply, carefully evaluate your safety stock.
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