The Case Against Safety Stock: Why it doesn’t always work and what to do instead

Are you keeping piles of safety stock in your warehouse? If you’ve been using old methods of stock-keeping for a while, it’s likely you do have a surplus of stock for those ‘just in case’ scenarios when you’re at risk of stockouts – it’s a sensible choice. But did you know that safety stock could be losing you money over time, and that there are better ways to boost cash flow using more intuitive methods of stock replenishment? Read on for the case against traditional safety stock and what you, as a modern retailer, could try instead.

What is safety stock?

A lot of retailers keep safety stock – it’s the extra stock ordered in as a ‘cushion’ to protect you against going out-of-stock at inopportune times. There’s plenty of scenarios in which you may rely on safety stock: after all, suppliers leaving you in the lurch, or an unexpected surge in demand could strike at any time. Rather than be left with shelves empty of your best-sellers, and customers growing increasingly frustrated at not getting what they came for, it’s vital to be prepared with emergency products to keep that all-important cash flow moving.

What are the downfalls of safety stock?

Now that we’ve built up the important purpose of safety stock, let’s discuss the downsides to keeping it. As a modern retailer in today’s rapidly evolving e-commerce climate, keeping a surplus of stock isn’t always in your best interests.

  • Safety stock is static. You won’t need the same amount of safety stock in January as you might in May. But if the amount you deem ‘safety stock’ was initially based on guesswork, a period of high sales, a seasonal spike or perhaps very recent sales history, it will stay at that amount  – not fluctuating or diminishing as demand changes or your business grows – unless you repeatedly recalculate it.

This means every single month you’ll be manually assessing how much extra stock you need. On what are you basing the demand? Are you calculating it monthly, or even weekly? Do you have to reassess it every time you make a new purchase order? That’s a lot of time spent in spreadsheets!

  • Static, unsold stock is a blocker to cash flow. Keeping extra stock that may have been required at one time, but still isn’t sold months down the line is a blocker to cash flow and will significantly impact your bottom line. It takes up valuable space in your warehouse for months on end and is, in effect, a waste of your money. This especially applies to products that go out of date quickly, such as food products; or items that may go out of style, such as electronics or fashion garments – which may even end up liquidated.

What’s a better solution than keeping safety stock?

When it comes to optimal stock-keeping, the goal is to strike that delicate balance between having enough of your best-sellers to meet demand but not so much that you end up with piles of unsold items taking up space in the warehouse. To forecast this correctly requires in-depth data that zooms right in on your inventory and factors in market fluctuations, seasonality and supplier lead times… but carrying out these calculations manually is time-consuming and repetitive.

With Inventory Planner, there are several intelligent, time-saving ways to ensure you’re ordering in the exact right amount of stock at the right times, effectively eliminating the need for ‘safety stock’ as a concept. Here are just three:

1. Using the ‘days of stock’ method to calculate optimum stock levels

A nifty way to ensure optimal stock levels all year round is to use the ‘days of stock’ function in Inventory Planner. ‘Days of stock’ refers to the number of days you want your next inventory purchase to cover (without out-of-stock days). A regular amount of ‘days of stock’ to purchase for would be 30 days, for example.

By extending your ‘days of stock’ to slightly more than your usual stock cover period, perhaps 5 days more, you’ll receive an optimal amount of inventory – and the number of extra units you require as ‘safety stock’ will dynamically reduce or fluctuate in tandem with your future sales forecasting.

2. Automatic replenishment suggestions

By taking your historic sales data into account as well as numerous factors that may affect demand, Inventory Planner automatically offers replenishment suggestions of all your SKUs – and warns you in advance if you’re about to go out-of-stock on specific items. From these replenishment suggestions, you can directly create a PO, saving you the time and effort of calculating them yourself and ensuring you’re always in stock of the items you sell the most.

3. Full visibility of supplier rules and lead times

Issues with suppliers are one of the leading causes of going unexpectedly out-of-stock; either there’s a pile-up at a port somewhere, container costs have gone up or lead times have extended; and sometimes retailers are none the wiser until their new stock doesn’t show up on time. Inventory Planner offers full visibility of your entire inventory as well as supplier information – so supplier delays, costs, performance and changes of rules can all be factored into what stock you order and when.

Let’s summarise the benefits of using intelligent inventory planning software instead of static safety stock:

  • No more time wasted on manual calculations.

Inventory Planner dynamically calculates the optimal number of units for your next purchase based on your data-driven forecasting – automatically covering the need for safety stock without manual calculations.

  • Reduces the chance of overstock and out-of-stock.

Your stock is always at its optimum level; that’s exactly enough to cover demand, as well as just enough to cover for emergencies, unexpected sales or supply chain issues.

  • An optimized inventory means boosted cash flow.

No more cash trapped in unsold ‘safety stock’, or static items going out of date and liquidated. Instead, dynamic stock levels that keep cash flow moving and boost your bottom line.

If you want to learn more about how Inventory Planner’s data-led forecasting and purchasing recommendations can transform your inventory methods, book a free 14 day trial with us today.