Safety Stock for Inventory Management

Safety stock is simply extra inventory held in case demand increases unexpectedly. This means it’s additional stock above the desired inventory level that you would usually hold for day-to-day operations.  This is calculated per inventoried product and per facility.  There are multiple formulas you can use to calculate this in Versa. Choose which formula to use from Setup menu, Feature Settings, Inventory Management. 

Versa also use safety stock as minimal inventory in your reorder points.

Formula 1 - Service Level, Lead Time and Average Demand (Normal Distribution with Uncertainty on the Lead Time)

This formula requires lead time which is calculated by looking at the purchase order history. If the product is not purchased and manufactured , do not use this formula.

If your average daily sales is stable but your lead time is variable then you can use this formula

Z x Average Daily Sales x Lead Time Deviation 

Z is the desired service level, Lead Time Deviation is the standard deviation of lead time.

The service level factor refers to the targeted level of customer satisfaction or fulfillment that a company aims to achieve in terms of product availability. It's a crucial metric used to balance the costs associated with holding excess inventory against the costs of potential stockouts and lost sales.

Service level is typically expressed as a percentage and represents the probability that demand for a product will be met from available inventory during a certain period. Common service level percentages include 90%, 95%, 98%, and 99%, among others. 100% service level is impossible as it implies you need to have infinite inventory.

Formula 2 - Average Demand and Maximum Lead Time (Average Max Formula)

This formula requires lead time which is calculated by looking at the purchase order history. If the product is not purchased and manufactured , do not use this formula.

This is calculated using the Average – Max Formula which calculates the average max units you need at any one time.  This can be skewed if your lead time unexpectedly changed recently. 

The calculation is: (Maximum Daily Sale x Maximum Lead Time) – (Average Daily Sale x Average Lead Time)

Using a 12 month period of data you can calculate your average daily sales also look for the maximum sales you had in one day.

Look at the purchase orders you received for the year and determine the average lead time and maximum lead time.

Now that you have the figures, simply put them into the average-max formula and you will have your safety stock calculation.

Formula 3 - Average Demand and Days of Inventory (Basic Safety Stock Formula)

This formula into consideration the number of products you sell per day and the number of days of inventory you want to hold at any one time. This is the simplest formula but might not be sufficient as it does not consider variation in demand and lead time.

Average Daily Sale x Number of days of Inventory to Hold

You can set up the days of inventory to use in this formula from Setup, Feature Settings, Inventory Management.  Choose the formula to be Average Demand and Days of Inventory, after this formula is chosen, you can enter the days of inventory.