The premise of inventory control is simple: order as little stock as possible without running out. But in practice, inventory control can be quite complex. Fortunately, there are inventory control formulas and ratios to help you make key stocking decisions. Formulas like economic order quantity and reorder point give businesses concrete advice on how much stock to order and when. Another key component of inventory control: establishing safety stock inventory.
Safety stock inventory, also referred to as buffer stock, is extra inventory you keep on hand just in case something unexpected happens.
After all, even though your vendors typically deliver on schedule, disruptions do occur. From hurricanes to traffic jams to labor strikes, there are tons of reasons why a much-needed shipment could be delayed. Maintaining buffer stock can protect you from running out of product.
Safety stock also keeps your customers satisfied should demand for a product rise unexpectedly. For example, during the beginning of the coronavirus pandemic, many retailers experienced shortages of products like toilet paper, hand soap and yeast. Those who maintained emergency stock of these items enjoyed the most customer satisfaction and boosted revenue during uncertain economic times.
How do I calculate safety stock?
To calculate safety stock, use this formula: (maximum daily usage x maximum lead time in days) – (average daily usage x average lead time in days)
You’ll need to gather four key numbers from your inventory reports to calculate safety stock:
Maximum daily usage
Average daily usage
Maximum lead time
Average lead time
Daily usage is exactly what it sounds like. How much of a product you use in a day.
Lead time is the number of days it takes for your order to arrive once you’ve placed it. You can calculate lead time by adding your supply delay and reordering delay.
To clarify, reordering delay refers to any waiting time to place your order. Perhaps you place your orders on Tuesdays, but your supplier processes orders on Fridays. That’s a three-day reordering delay.
Supply delay is how long it takes your order to arrive once it’s been accepted by the provider.
How do I calculate the reorder point formula?
Determine the reorder point formula using this equation: [average daily sales * lead time (in days)] + safety stock
The reorder point formula specifies when you should reorder inventory. You’ll need safety stock to calculate this recommendation. You’ll also need to determine lead time.
Inventory Management Software for Safety Stock
Modern, inexpensive inventory management software can help you take control of your inventory in an afternoon. Sortly, a top-rated inventory app, simplifies and streamlines your inventory management processes by automating the most tedious of inventory tasks.
With Sortly, you’ll save time, money and stress with key features like barcode/QR code scanning, low stock alerts, customizable reports and an intuitive, visual inventory list. You’ll also easily get the data you need to calculate essential formulas like safety stock, reorder point and economic order quantity.
Ready to get your inventory under control? Try Sortly free for two weeks now!
Lauren writes about inventory for Sortly. Her favorite thing to organize? Her comically large collection of stuffed animals.