As a small manufacturer, one of the most important things you can do to design a process that ensures you maintain reliable and adequate levels of your stock: for both your raw materials and your finished product line.
Why? Because unexpectedly running short of any stock can have a severe impact on your entire supply chain: from overpaying for your supplies, right through to receiving poor reviews from customers for late shipments.
This can be a really costly mistake to make, especially for a small business where cashflow is king. It’s also a mistake that can be avoided quite easily with the right tools and tracking in place. Pne of those tools is using Safety Stock levels for your inventory.
☞ Need to get your raw material and product inventory under control?
Try Craftybase - the inventory and manufacturing solution for DTC sellers. Track raw materials and product stock levels (in real time!), COGS, shop floor assignment and much more.
It's your new production central.
Establishing safety stock points is an established strategy used by thousands of manufacturers both large and small. In this blog post, we’ll show you how calculating your safety stock levels will help guard against sudden surges in demand or unexpected supply chain delays, and why having the right amount on hand can be critical for your business operations.
As a bonus, we’ll also give you a rundown of how you determine what kind of safety stock you need and provide you with some tried and true formulas you can integrate into your company’s inventory management strategy.
What is Safety Stock?
Let’s firstly cover what Safety Stock is so we are all on the same page.
Safety Stock is the backup inventory that you keep on hand to mitigate any unexpected spikes in demand or supply chain disruptions.
A good analogy for your safety stock is keeping an umbrella handy, just in case of stormy weather. It’s not a huge investment or much of a bother to have it close to hand on fine days even if you aren’t using it.
Without it there and available when it rains, you’ll be in a wet and miserable state and wishing you had it on hand.
Why is keeping Safety Stock important for small makers?
If you are thinking that Safety Stock is a concept only relevant for Mr Huge Manufacturing Business Inc., you’d be wrong. For small makers, maintaining adequate levels of safety stock is especially (and maybe more) important.
This is because these businesses lack the resources of larger organizations, meaning they cannot afford to make mistakes such as overstocking or running low on inventory due to unexpected changes in demand. Having an appropriate amount of safety stock provides small manufacturers with a buffer against sudden shifts in supply and demand, ensuring that their business operations remain uninterrupted.
Additionally, having the right amount of safety stock on hand can help to reduce losses associated with overstocking and improve customer satisfaction by reducing delivery delays due to shortages.
In short, having a sufficient level of safety stock is pretty much essential for small manufacturers looking to stay competitive (and sane!) in today’s market.
How to calculate your safety stock
As we have discussed above, safety stock is an essential component that every business (both large and small) should consider. But here comes the slightly daunting bit: how exactly do you calculate it?
Understanding the factors that affect safety stock calculation is crucial - it’s important to not take a “stab in the dark” approach to this task as it requires a close look at your production line and your supplier history.
For manufacturers, it’s important to note that you’ll need two different calculations - one for your raw materials and another for your product stock.
Your product safety stock points will be impacted by your raw material safety stock, as delays to your materials may have an impact on your production process.
The Simplified Product Safety Stock Formula
This simplified formula for calculating safety stock takes the daily volume of product sold and multiplies it by the number of days’ worth of safety stock that is necessary. To illustrate, a business selling 500 of a specific item every day would need to have three days’ worth of safety stock on hand, meaning they need a total safety stock inventory of 1,500 units.
This formula does not take into account factors such as demand and lead time, so it is best used for initial estimates, and is only really useful for resale product situations as it doesn’t allow for manufacturing time.
Advanced safety stock calculation factors to consider
To come up with a safety stock figure that allows for your complete manufacturing supply chain, let’s take a look now at some of the factors that you should consider in addition to the simple formula above to get your safety stock levels more fine tuned:
Raw Material Lead Time
Your lead time is the estimated delivery time for each order of raw material stock you make, and it’s important to note that this can vary depending on seasonality and other external factors.
As an “worst case” example of lead time, if you have an overseas supplier that makes your raw materials to order, this would create a situation where you would have a significant amount of lead time that needs to be factored into your safety stock levels: in other words, you’ll likely want to keep more on hand for these inventory items to buffer yourself from unexpected dips in inventory levels. Why? Because if you run out of this item, you are going to be waiting significant amounts of time to replenish your stock.
Using another (extreme) example, if you have a supplier that has a same-day delivery service, you might be able to select a lower safety stock level for these items as it’s not a huge drama if you run out from time to time.
Raw Material Usage Rate
If you’re also dealing with raw materials, the usage rate of these will need to be taken into account. This means that you’ll need to calculate how much material is used in each unit, and how many products you manufacture in a time period.
Reorder Point
Another factor calculating your safety stock level is to determine your reorder points. This is simply the point at which you need to place a new order with your supplier in order to replenish your inventory levels.
Your reorder point should be based on usage rate, lead time, and safety stock levels - if your inventory level reaches this point, you should order more to prevent critical stock-outs.
Once you’ve calculated these three items, it’s time to put them all together and determine your final safety stock level. To do this, you’ll want to add up your lead time in days, multiply it by the stock-out rate figure, and then add the result to your reorder point.
The resulting figure is your ideal safety stock level - this will give you a good indication of how much extra inventory you need to keep on hand in order to ensure that customer orders are always met.
Product Manufacturing Time
The last variable to consider when calculating your product safety stock is the amount of time it takes for you to manufacture an item. This can vary depending on complexity, and if you’re dealing with a product that needs a number of components to be assembled, this will impact the length of time it takes to produce a single unit.
Product Stock-out Rate
Lead time isn’t the whole equation however. Another good metric to have on hand is your stock-out rate, which is the percentage of orders that could not be fulfilled due to inventory shortages.
This can be done by looking at your inventory history and noting how frequently you have been unable to meet customer orders due to stock-outs.
Knowing your stock-out rate is important as it helps you to determine how much extra stock you need to maintain in order to ensure that you can meet your customer demands and keep them happy.
Software to track your safety stock
While it is possible to manually calculate safety stock levels with spreadsheets, this can be time-consuming and prone to errors.
Fortunately, there are a number of software solutions on the market that make tracking your inventory - and replenishing it accordingly - much easier.
Using a dedicated software program to manage your safety stock can help to improve accuracy and efficiency in the safety stock calculation process. There are many different kinds of software that you can use, such as inventory control systems (MRP or ERP) or demand forecasting programs. These programs allow you to easily track usage rates and lead times, quickly generate reports on past orders, and provide you with real-time data on inventory levels and stock-outs.
Overall, using such software programs can help to streamline the safety stock calculation process and ensure that your orders are always met without having to worry about running out of stock.
Using Craftybase to simplify your safety stock calculations and tracking
As a small business owner, keeping track of your inventory can be overwhelming. Safety stock calculations and tracking are vital to ensure that you have the necessary items to fulfil orders and keep your customers happy.
This is where Craftybase steps in to simplify the process. Craftybase is a raw material inventory management software that enables you to keep track of your inventory and can help to automate your safety stock calculations. Set low stock limits and create automatic stock alerts to make tracking your safety levels a breeze!
With its user-friendly interface and powerful features, Craftybase makes it easy to manage your inventory, so you can focus on what you do best - creating beautiful products to sell. Try us for free today!
