Managing an e-commerce is a complex task, where multiple variables must be taken into account to achieve business success.
No doubt one of the main ones is the calculation of the safety stock, and its management, to avoid situations of stock rupture. At Boardfy we help you to be competitive, but it will be useless to have the best price of the market, or to invest in promotional campaigns, if you don’t have stock to sell.
That’s why, in this post, we want to give you the best tips to make sure this doesn´t happen to you.
So keep reading if you want to know how to calculate the safety stock of your online store, and prevent unexpected events from leaving your warehouse empty.
In this article, we will go through a safety stock estimation and provide you with a step-by-step guide on how to calculate your safety stock.
What is safety stock?
As we have already mentioned, having a safety stock to deal with unforeseen situations is crucial when managing an e-commerce business. What is more, for the correct calculation and management of the stock, all the departments involved must be in sync.
But what is safety stock?
Safety stock is the minimum amount of stock needed in the warehouse to meet product demand in case of supply problems, unexpected sales peaks or any other unpredictable situation.
In other words, keeping a safety stock will minimize the risk of stockouts in your e-commerce.
Of course, this safety stock will not be the same for all the products you sell in your e-commerce. The amount of stock for each item must be estimated independently, based on certain criteria such as its sales rate, its price, the space it occupies, etc.
Notice that it is just as important to prevent a stockout situation as it is to avoid storing more product units than necessary. This would only result in extra logistics and/or storage costs.
Therefore, it is essential to carry out a correct stock calculation and identify when a new order of goods should be placed (reorder point).
The importance of the reorder point
The reorder point is a further filter to avoid stock-outs. It determines the optimum time at which a reorder should be placed with the supplier so that the goods arrive before it is necessary to draw on safety stock.
To determine when to reorder, there are 2 main factors to consider regarding the supplier:
Reliability: do they respond and process orders quickly; do they always have the products you order or are they sometimes out of stock?
Delivery time: how long does it take for orders to arrive and do they meet the agreed deadlines?
Depending on these criteria, you will be able to set a more or less tight order point that will allow you to manage your stock correctly.
If you want to know how to calculate it, here is the formula:
RP = SS + (AD x DT)
RP: reorder point.
SS: safety stock.
AD: average product demand.
DT: supplier’s normal delivery time or lead time.
Need some help?
Well, read on because we will see two practical examples of formulas to calculate your safety stock further down the post.
What is the use of safety stock?
You are probably already aware of how important it is to maintain a safety stock for your e-commerce.
To sum up, this safety stock allows you to respond to:
An unforeseen or unpredictable high product demand.
Incidents with a supplier. Such as a delay in the delivery time due to logistics issues.
Problems in your own, or your supplier’s, production chain.
Internal or external causes beyond your control: strikes, pandemics, wars, etc. Why is it essential?
Basically to avoid the loss of sales caused by a stockout.
Having a safety stock allows you to continue selling even if the flow of goods has been interrupted or you have sold more units than expected.
And as we have already mentioned, the management of this stock is closely linked to the reorder point. So any change in the safety stock will affect the optimal time to reorder.
Advantages of having a safety stock
The main one is without a doubt to avoid a loss of sales, but it has other benefits beyond preventing a reduction in revenue. For instance:
Maintain the trust of your customers: not having availability of the products they want, can be seen as a lack of professionalism or foresight of your company.
Build customer loyalty: if you don’t have the product they need, they will often buy it from your competitors, even if yours is cheaper.
Offer a better service: anticipating setbacks so that they don’t affect you will result in an overall better user experience.
Get ahead of the game and be the best option against the competition: applying all of the above will help you become your audience’s first choice. And, if you also have the most attractive price, the sale is almost guaranteed.
Avoid cost overruns: if your online store cannot afford to be out of stock in certain products, you will have to bear an extra cost to obtain them through alternative channels (more expensive suppliers or express shipping).
Risks of miscalculating or mismanaging the safety stock
Although it is true that having a safety stock provides some breathing space, and gives you a certain margin of maneuver in the event of problems with delivery times, whatever the cause, it also comes with certain disadvantages.
The most important one is the cost of advancing and storing these extra stocks.
Furthermore, if you are dealing with perishable products, excessive storage of these can result in reaching their expiration date before you can even sell them. As you can see, it is just as dangerous to understock as it is to overstock your safety stock. Hence the importance of a correct estimation and management of this stock.
Want to find out how to calculate the amount of safety stock required? We show you how in the following section.
Formula for estimating safety stock and being prepared against unexpected circumstances
By now we are sure no one has any doubts about the importance of safety stock, but..
How to calculate your safety stock?
Although it is difficult to properly estimate the amount of safety stock needed in such a changing and unpredictable market as the current one, here is a simplified formula that will help you get an approximate orientation. However, if the product is seasonal, remember taking into account the time of the year you are in to calculate the safety stock. For instance, if it is a toy, the average demand during Christmas will be much higher than in spring.
That said, here is the safety stock formula:
SS = (MDT – DT) * AD
SS: safety stock.
MDT: maximum delivery time of the supplier in the event of an incident. DT: usual delivery time of the goods under normal circumstances. AD: average demand for a given product.
It is important to have real data to properly estimate the necessary stock. If possible, at least a full year’s worth of data to be able to determine the sales cycles of each product. To do this, it is quite useful to have a warehouse management software, where you can see the records of incoming and outgoing items. It will also help you define with more precision both the maximum and the average delivery time of each product.
All of this will help you make sure that the safety stock calculated for that particular product is as tight as possible.
Examples of how safety stock is calculated
Theory is all well and good on paper, but let´s put it into practice. Here are some examples on safety stock and order point, so you can calculate the optimal amount of safety stock and the best time to buy for each one of your e-commerce products:
Example for minimum safety stock calculation
Let’s remember the formula: SS = (MDT – DT) * AD. In order to apply it, we must have all the necessary data first.
Maximum delivery time in case of delays or incidents (MDT) = 30 days.
Standard delivery time (DT) = 7 days.
Average demand (AD), or otherwise, the expected demand at that time of the year = 50 pcs/day.
Now let´s replace the variables for the above data:
SS = (30 days – 7 days) x 50 pcs/day = 1,150 pcs.
Therefore, in this case, the quantity required for the safety stock will be 1,150 units. Example for reorder point calculation:
In this case, we are going to calculate when is the optimal time to reorder that product. The formula is: RP = SS + (DM x PE). First we must write down all the required data:
Safety stock from the previous example (SS) = 1,150 pcs.
Average product demand (AD) = 50 pcs/day.
Normal delivery time (SD) = 7 days.
Now just replace the data in the formula and we get:
RP = 1,150 pcs + (50 pcs/day x 7 days) = 1,500 pcs.
Therefore, you will reach your reorder point when there are 1,500 units left in the warehouse.
How to calculate minimum stock, maximum stock and reorder point in excel?
You just have to identify and locate the cells with the different data variables when entering the formula. This way you will be able to calculate various assumptions quickly.
If you have a large inventory, however, we advise you to use specialized software to help you calculate the safety stock based on many other possible variables.
Other stock types you may encounter
When managing a warehouse, there are many other types of stock that can be calculated and that are interesting to take into account.
We are just going to mention some of them:
Stock on hand
Stock in transit
Tips on how to calculate your safety stock
Having a regular buffer stock provides security for all the company departments, especially in today’s volatile environment.
This stock gives you the peace of mind of knowing that you have the necessary units in your warehouse to cover the expected sales volume until the next delivery arrives within the estimated maximum timeframe. Under normal circumstances, the safety stock will prevent you from having to calculate when a stockout will occur.
Before finishing this post, we would like to review the most important points regarding safety stock and give you some final tips.
Remember, safety stock helps you to continue selling your products in the face of unforeseen events due to a delay in the delivery of ordered goods.
Its main benefits are:
Maintain customer trust and loyalty.
Offer a better user experience and position yourself ahead of your competitors.
Avoid cost overruns by having to resort to express transportation or other suppliers.
On the other hand, make sure you are not accumulating excess safety stock. Here are some tips to achieve this:
Personalize the estimation as much as possible: take into account the type of product, the time of year, etc.
Use technology to help you: use machine learning-based software to adjust the amount of safety stock required as much as possible.
Optimize processes and workflows to streamline operations in all departments, from purchasing to warehousing.
Boardfy helps you get the most out of your e-commerce stock.
We hope this post has been useful and, from now on, you know how much safety stock you need to sleep tight at night.
However, keep in mind that it will be useless to have safety stock if your sales don´t grow at the expected rate.
If you want to become the best in the market and boost your sales, Boardfy can help you!
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Keep your competitors under control.
Find out which of your products are competitive.
Optimize your Google Shopping campaigns.
Identify new products to add to your ecommerce.
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