Safety stock is kept as a buffer for unexpected supply or demand problems. Companies use it to reduce the risk of running out of stock, but determining the correct amount can be challenging. Newer companies are more likely to hold safety stocks, and seasonal demand is also a factor.
Safety stock is stock that is kept available as a buffer in the event of an expected problem with supply or an increase in demand. Businesses use safety stock supplies to reduce the risk of running out of stock and not having stock available for customers who want to buy it. Calculating how much stock to hold in the form of reserve inventory is a tricky balance because companies don’t want to keep unused stock on hand, but they also don’t want to run out of stock.
With a well-organized inventory system, companies know approximately what demand levels are like under normal circumstances, and they know the lead time required to obtain new supplies. When stock falls below a certain level, an order can be sent to fill it. By the time the order arrives, stock is often critically low and new stock brings levels back up to ensure there is sufficient availability.
However, sometimes they demand random raises and companies sell out sooner than expected. Similarly, problems with delivery, such as holidays that interrupt shipments, strikes, bad weather, manufacturing line problems, etc., can mean that stock is not delivered when expected. Even if the store orders in time, the new products will not arrive in time to be replenished before the store is out of stock.
Safety stock is a form of insurance against these unwanted events. A store maintains a stock of various items on hand in order to compensate for unexpected fluctuations in supply and demand. The store doesn’t want to be left with too many items because it must pay to get and store the stock, but it also doesn’t want to be out of stock at critical times. Determining the correct amount of safety stock to order can be challenging, and people may factor in seasonal issues, order history, and other information when deciding how much safety stock to hold.
Newer companies are more likely to hold safety stocks because they haven’t yet gotten to know their suppliers and customers. As the person in charge of inventory learns the business better, smaller supplies of safety stock can be maintained. Concerns such as the value of the shares and whether it is prone to expire are also important. Another problem may be seasonal demand; A store that orders items for the summer months, for example, would be less concerned about large orders at the beginning of the season, when they are likely to sell, while large stocks could become a problem at the end of the summer.
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