What is the Safety Inventory and how is it done?

Part of a company's success lies in good Logistics Management, which must be supported by an adequate inventory control, with full knowledge of the unforeseen circumstances, for which the calculation of the safety inventory, so that unnecessary costs are avoided.

What is the safety inventory?

The expression safety inventory It is used in the administrative context of an organization or company, understanding that it is the extra stock quantity that must be kept in warehouse, to face diverse and unforeseen situations, for For example, a stock failure, sudden increase in demand, equipment breakdowns, equipment failures, deliveries of raw material, workers' strike, among others.

For the aforementioned some people call it safety mattress, this is obvious, since said mattress has the ability to absorb sortary fluctuations in the entry or exit of merchandise to the warehouse or warehouse, for any of the eventualities mentioned.

Determining the volume for the safety inventoryAmong other elements, it involves the balance between the costs that would be incurred when running out of stock and the costs of maintaining a sufficient surplus to avoid probability.

Importance of emergency inventory

From the logistics point of view of the company, the term security stock is used with great caution, as it analyzes the level of additional that must be carried out to minimize the risk of shortages, either due to causes related to the supply or demand.

Adequate levels of security will allow the company to focus on its objectives with minimal risk, in addition to be prepared for difficult times, as it serves to meet demand, even when adverse situations arise and unexpected.

The precision when calculating it is important, since underestimating it could cause a lack of stock, and the overestimation would cause an increase in inventory costs.

Calculation of safety inventory

To perform this calculation, the following factors must be taken into account:

• The deadlines for delivery of orders.
• The demand for safety inventory.
• Standard deviation in the delivery time of orders.
• Standard deviation of demand.
• The desired service rate.

Formula for calculating safety inventory

Based on what has already been mentioned, the safety inventory it could prevent the product from being out of stock at some point and missing the opportunity to make sales, however, it is convenient keep an inventory in equilibrium, which is not too much above the sales projections and not too low not to do in shortage.

In some cases, companies simply estimate future demand. For example, if a company that manufactures car batteries receives a large order, it seems a good option to take into account the volume of that order when calculating the demand. In this case, it is convenient to calculate the average demand, and then add the demand obtained as a result of the large order.

Formula to use:

Future demand = average demand + the demand created by the order

It usually happens that the average demand does not provide enough information, especially when the demand fluctuates significantly from one moment to another.

That factor must be included in the calculation so that inventory is sufficient to cover unexpected increases in demand. So you have to create spreadsheets and find the standard deviation of the demand.

Calculation of safety inventory, formula to follow

To properly calculate safety inventory the following formula applies:

IS = (PME-PE) * DM

• IS (Safety Inventory)
• PME (Maximum Delivery Period) in which the supplier delivers the product assuming the possibility of delay.
• PE (Delivery Term) in normal circumstances, in which the supplier delivers the merchandise.
• DM (Average Demand) calculated for the determined product and in a normal situation.

From this m IS = (PME-PE) * DM

Through this safety inventory, it is possible to have a controlled stock of products, which will serve so that at the time of an unforeseen event outside the management of the company, there is no interruption in the supply of products to customers, without the customer having to suffer the consequences and sales mermen.

Conclution

To conclude, as a summary it is important to know that the safety inventory is a tool that buffers and protects companies from shortages caused by bad planning inventory, both in administrative and material management.

The security stock or safety inventory It is one of the most important perceptions to be used in inventory control within companies.

As a result of the improper calculation of this, companies must consider the high costs of a high inventory, the deterioration of items that are stored for a long time and otherwise may result in lost sales and possible losses.