Safety stock refers to an additional quantity of products held by retailers to cope with demand uncertainty and potential supply chain disruptions. It is essentially an additional stock buffer that is maintained above normal inventory levels to mitigate risks and ensure product availability for customers.
Safety stock is typically determined by considering several factors, such as:
- demand variability,
- replenishment lead times,
- seasonal fluctuations,
- supplier risks.
It aims to minimize the risk of stockouts, which could lead to customer dissatisfaction and loss of sales. Furthermore, it can also lead to damage to the company’s reputation.
By holding safety stock, companies can reduce the risk of lost sales, backorders, and dissatisfied customers.
