How much safety stock should a small seller hold?

Safety stock is the extra units you keep in case things do not go to plan. Hold too few and you run out when a busy week hits. Hold too many and your cash is parked on a shelf. A simple calculation gets you to a sensible middle.

What safety stock is protecting you from

Two things go wrong in a small business. Customers buy more than you expected, and the supplier takes longer than promised. Safety stock is a cushion for both. The simple method below focuses on the first, higher-than-usual sales, and you can add a few extra days for supplier delay.

The simple formula

Safety stock = (peak daily sales minus normal daily sales) times lead time in days.

Take a product that normally sells 5 units a day. On its busiest days, say during a festival week, it sells 9 a day. Your supplier needs 10 days to deliver a new batch.

Peak minus normal is 9 minus 5, which is 4 units a day. Multiply by the 10 day lead time: 4 times 10 is 40.

Your safety stock is 40 units.

Why this works

During the 10 days you wait for a new batch, normal sales are covered by your reorder point, which is explained in when to reorder stock. But if the next 10 days turn out to be busy ones, you sell 4 extra units each day. Over 10 days that is 40 more units than you planned for. The safety stock is exactly the extra you would need.

Getting the peak number

Do not guess. Look at your order history and find the highest day, or a typical high day, in the last few months. If your peak was a single day caused by a reel going viral, you may not want to plan for it every time. A busy-week average is often a better peak figure than the single highest day.

If you are new and have little history, start with a modest cushion, such as a few days of normal sales, and adjust as data comes in.

What if the supplier is the problem?

If your supplier is sometimes late, add the number of days they usually slip. If they promise 10 days and often take 14, use a lead time of 14 in the formula. With the same sales figures: 4 times 14 is 56 units. A reliable supplier lets you hold less.

The cost of the cushion

Each unit of safety stock is cash you do not get back until it sells. At Rs 100 a unit, 40 units is Rs 4,000 sitting there. That can be money well spent for a bestseller, and wasteful for a slow item. Hold safety stock mainly on products that sell steadily and matter to your income. For slow or seasonal items, let them run out and accept it.

The monthly cost of keeping stock on the shelf puts a price on holding extra units, and bulk orders and lot pricing is useful if you also sell in bigger lots.

A short routine

• Pick your top products.
• Write down normal daily sales, peak daily sales and real lead time.
• Do the subtraction and the multiplication.
• Add the result to your reorder point.
• Review before every festival season.

This is not a perfect model, but it is a thousand times better than reordering by feel.