Tồn kho an toàn plays an important role in supply chain management, this is a shield that protects businesses from unexpected changes in demand and supply chain incidents. However, effective management is not easy, because it requires a lot of resources and effort. Learn about how to calculate safety inventory and how to use it warehouse management software for safe and effective inventory management.
What is safety inventory? The Impact of Safety Stock on Inventory Management
Maintaining safety stock can have a number of positive impacts on inventory management:
- Prevent stock outs: Helping businesses always be "in stock" even during times of highest demand or unexpected supply problems, companies still have enough inventory to promptly meet customer orders. row. Bring credibility to your business and maintain customer satisfaction, preventing potential loss of revenue due to out of stock.
- Minimize variations in delivery times: Sometimes delivery delays from suppliers are unavoidable, possibly due to many reasons such as weather or product quality. Therefore, maintaining a safe inventory is the best solution for businesses to maintain production operations without interruption due to late deliveries from suppliers.
- Enables better production planning: Effective Inventory Management enables more accurate forecasting and production planning through analysis of historical data on commodity demand, market trends and supplier performance. This helps optimize inventory levels, minimize overstock and reduce unnecessary costs.
- Increase customer satisfaction: Effective inventory management plays an important role in continuously meeting customer demand without hindrance. Maintaining safe inventory levels is essential in ensuring users make purchases without interruption, thereby driving customer satisfaction and trust.
- Manage seasonal demand: In industries, demand for goods will often fluctuate seasonally. Safety stock helps companies prepare for peak season and ensures that they have the ability to meet growing customer demand without stress.
Read More About: Optimization inventory forecast Efficient with ERP
What is safety inventory?
Formula for calculating safety inventory
Determining safety inventory levels requires careful analysis of historical sales data, variations in delivery times, and desired service levels. Although there are many different methods, below are some of the common ways to calculate safety inventory in the warehouse software like:
| Calculation method | Calculation formula |
|---|---|
| Basic method | = Average sales quantity * Delivery time |
| Average – Maximum Method | = (Maximum Sales Quantity x Maximum Delivery Time) – (Average Sales Quantity x Average Delivery Time) |
| Standard deviation method with fluctuations in commodity demand | = Z-Score * Standard Deviation of Demand * Square Root of Average Delivery Time |
| Standard deviation method with variation in delivery time | = Z-Score * Average Sales * Standard Deviation of Delivery Time |
Explain the formula for calculating safety stock
- Average number of sales: The average quantity of a product sold or consumed per day.
- Delivery time (in days): Lead time is the period of time from placing an order to receiving the goods from the supplier. By estimating delivery times accurately, businesses can adjust safety stock levels more effectively, even when there are delays in deliveries from suppliers.
- Maximum sales quantity: The highest quantity of a product sold or consumed in a day.
- Maximum delivery time: Longest time to receive goods after ordering from supplier.
- Average delivery time: Average time to receive goods after ordering from the supplier.
- Standard deviation of demand: This is a quantity representing the fluctuation in consumer demand of customers in a certain period. In other words, it is a measure of the difference between actual demand and average demand. This index can be calculated by analyzing historical demand data.
- Standard deviation of delivery time: A measure of how much the actual delivery time varies from the average delivery time.
- Z-Score: Z-score is a statistical indicator of how far away a particular value is from the mean of a data set. In inventory management, the Z-Score is used to determine the amount of safety stock that needs to be held to achieve the desired service level. The higher the Z-score, the more safety stock required to achieve the desired service level.
For example, if an organization wants to achieve a 90% service level, it needs to keep enough safety stock to meet demand that is 1.645 standard deviations above average demand. This means that there is a 10% chance that demand will be greater than the safety stock level and the organization will experience a stock out situation. The commonly used Z score is: 1.28 corresponds to a service level of 80%, which is a relatively low service level; 1,645 corresponds to a 90% service level, which is the more common service level; 1.96 corresponds to a service level of 95%, which is a high service level.
It's important to note that different industries and businesses may have unique considerations in calculating safety stock.
Distinguish between Safety Inventory and Reorder point
Reorder point and safety stock are interlinked concepts in inventory management, both aimed at ensuring a balance between avoiding stockouts and minimizing excess inventory.
Distinguish between Safety Stock and Reorder Points
The eorder point is the remaining inventory level and a new order will be placed when the inventory level drops close to the reorder point to replenish goods. The specific goal of this process is to receive new orders before existing inventory is exhausted and prevent "undersupply".
>>>> See more: What is Reorder Point? How to manage reorder points effectively
In contrast, safety inventory is the amount of goods held in reserve to guard against spikes in demand or interruptions in supply. This ensures that even if there is an unexpected increase in demand or there is a delay in receiving goods from suppliers, there will still be enough stock to meet customer needs. Safe inventory levels help minimize shortages and maintain links between customers and businesses. Thanks to safe inventory, businesses will not run out of goods, even when there are unexpected fluctuations.
In short, Reorder point is the minimum inventory level that a business needs to maintain to meet customer needs during delivery. Reorder point includes safety stock, which is a reserve of goods to guard against unexpected fluctuations in demand or supply disruptions.
Calculate Safety Inventory in Viindoo
Viindoo Warehouse Management Software is a component of the comprehensive Viindoo Business Management Software System. Viindoo is known as an outstanding comprehensive management solution with the strong point of being designed to integrate data from many different management systems from businesses. The application will collect real-time data, produce intuitive reports and provide in-depth data analysis capabilities to support the best management direction for the business.
In particular, when calculating safety inventory levels, Viindoo software provides all the necessary data, including:
- Historical Demand Data (Sales Quantity Report): Sales Quantity Data, Average Sales Quantity, Maximum Sales Quantity
Product sales data in Viindoo Software
- Past delivery time data: Delivery time data, Average delivery time, Maximum delivery time
Delivery time data by product in Viindoo Software
>>> See More About: Inventory report: Inventory reporting templates and effective solutions
FAQFAQs
What is the difference between safety inventory and cycle inventory?
Safety inventory: Additional inventory is held to protect against demand fluctuations and supply disruptions.
Cycle inventory: Inventory needed to meet regular demand over a cyclical period.
What is the biggest impact on calculating safety inventory levels?
Accuracy of historical demand data and historical delivery times.
Can Viindoo Warehouse Management Software automatically calculate safety inventory?
No, but the app will provide detailed data on historical demand, delivery time variations, and other relevant factors needed to calculate accurate safety stock. This feature helps businesses optimize inventory levels, ensure stable operations and effective supply chain management.
Conclude
Safe inventory is an important factor for businesses in effective inventory management. By calculating safety inventory levels and implementing appropriate management strategies, businesses can optimize the benefits that safety inventory brings and enhance reputation as well as increase satisfaction in the eyes of customers. client. Businesses can take advantage of Warehouse Management software Viindoo to support analysis and success.
All-in-one Warehouse Management Software Solution
FREE FOREVER
Get started now to increase the competitiveness of your Business!
