The main purpose of inventory is to ensure that customer demand can be satisfied effectively so it is essential that running out of inventory, or a “stock-out” is avoided. Holding a level of “safety-stock” or “buffer-stock”, whether it be for raw materials, finished goods or WiP, should ensure an organisation prevents a stock-out situation.
To determine the level of safety stock required, an organisation should take into account:
- The value of the item
- The holding costs
- Forecasted demand
- The warehouse space available
- The replenishment time or lead time from supplier
Ultimately, Safety stock is required for those occasions when actual usage exceeds forecasted demand. It is also insurance against disruption in supply caused by quality issues or late deliveries.