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The Importance of Safety Stock for Your E‑Commerce Business
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Stocking out on any online website or marketplace, such as Amazon, is detrimental for many reasons, such as the following:
- Customers will likely take their business to another seller.
- You can lose Buy Box share.
- Any consistent demand or sales velocity will be stifled.
- Your performance metrics will be negatively impacted.
Even with a calculated inventory management and demand forecasting strategy in place, you should carry safety stock to help address any unforeseen inventory issues. Safety stock is additional inventory you hold for emergency circumstances, accounting for any unanticipated variability from customers or suppliers.
Safety stock can prove useful with supply chain disruptions such as breakdowns in production machinery, last-minute manufacturer delays, weather-related roadblocks impacting your deliveries, or unexpected spikes in product demand. By keeping safety stock on hand, you can temporarily cover incorrect forecast calculations or supplier mistakes while you expedite additional inventory. Safety stock gives you a buffer and helps you mitigate the risk of facing a full-fledged stockout, which can spiral into lost customers.
How to Calculate Safety Stock
To calculate how much safety stock you should have, you will need your inventory purchase history and sales order history on hand. For each product in your catalog, identify the maximum daily usage, maximum lead time in days, average daily usage, and average lead time in days. Average daily usage refers to the number of products you sell per day and lead time refers to the time it takes between you ordering the shipment to when it reaches your warehouse.
If you order products on a weekly cadence instead of daily, you can use maximum and average weekly usage rather than daily usage. To calculate average daily usage and average lead time, reference your sales and lead time for the last month or so and use the average number to estimate what you can expect.
Once you have identified these four numbers, you will multiply the maximum daily usage by the maximum lead time. By using these maximum scenarios, you are buying yourself more buffer room for safety stock. Next, you should multiply the average daily usage by the average lead time, which will give you the total of what you would order on a typical order since it represents what you need to replenish inventory based on average demand.
Lastly, subtract the average number from the maximum number to get your final safety stock calculation. It is important to note that this formula is not a guarantee, but it should be enough safety stock to prevent complete stockouts. It can be seen below:
(Maximum daily usage x maximum lead time) – (average daily usage x average lead time)
If anything is constant on Amazon, it is how often the marketplace changes. From fees and policies to the number of sellers on the platform, you have likely grown to expect the unexpected. Safety stock can be an extremely useful component of your inventory management strategy and can help you effectively navigate any unpredictable inventory emergencies, mitigate the risk of future stockout scenarios, and improve your overall demand forecasting capabilities.
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