In the world of ecommerce, customer expectations are higher than ever. Shoppers want their orders delivered quickly, accurately, and without delay. For online retailers, this means having the right products in stock at the right time. But how do you ensure you never run out of popular items—or tie up too much cash in excess inventory? The answer lies in understanding and managing safety stock.
In this guide, we will walk you through everything you need to know about safety stock.
What is safety stock?
Safety stock is extra inventory kept on hand to protect against uncertainties in demand and supply. Think of it as a buffer—a cushion that helps you avoid stockouts when sales spike unexpectedly or when suppliers are delayed.
Imagine you sell phone cases online. You usually sell 100 cases a week, but sometimes demand jumps to 150. Or maybe your supplier occasionally takes longer than expected to deliver new stock. Safety stock ensures you can keep fulfilling orders even when things don’t go as planned.
Why is safety stock important in ecommerce?
Safety stock plays a crucial role in ecommerce, especially when it comes to keeping your customers happy and your business running smoothly. Here’s why it matters so much.
Prevents running out of stock
Imagine a customer visits your online store, excited to buy a product, only to find it’s sold out. Not only do you lose that sale, but you might also lose the customer for good. Safety stock helps make sure you always have enough products on hand to meet demand, even when sales are higher than usual.
Handles sudden spikes in orders
Online shopping can be unpredictable. Maybe a product goes viral, or you run a successful promotion, and suddenly everyone wants to buy the same item. Safety stock acts as a buffer, so you can keep fulfilling orders even when demand unexpectedly jumps.
Protects against supplier delays
Sometimes, your suppliers might take longer than expected to deliver new stock. This could be due to shipping delays, production issues, or even customs holdups. With safety stock, you have extra inventory to cover these delays, so your customers aren’t left waiting.
Supports selling on multiple platforms
If you sell on your own website, plus marketplaces like Amazon or eBay, it’s even more important to avoid running out of stock. Safety stock helps you keep up with orders from all your sales channels, so you don’t disappoint customers anywhere.
Builds trust and loyalty
When customers know they can count on you to have what they want, they’re more likely to come back and recommend your store to others. Consistent product availability, thanks to safety stock, helps you build a strong reputation and loyal customer base.
5 key terms you need to know
Before diving deeper, let’s clarify some essential inventory terms:
- Lead time. the time it takes from placing an order with your supplier to receiving the goods.
- Demand variability. how much your sales fluctuate over time.
- Supply variability. how much your supplier’s delivery times vary.
- Reorder point. the inventory level at which you place a new order to replenish stock.
- Stockout. when you run out of a product and can’t fulfill customer orders.
How does safety stock work?
Safety stock acts as a buffer between your regular inventory and unexpected events. Here’s a simple example:
- You sell 100 units per week.
- Your supplier takes 2 weeks to deliver new stock.
- You keep 200 units on hand (enough for 2 weeks).
- But sometimes, demand jumps to 150 units per week, or your supplier is late.
If you only keep 200 units, you risk running out. By adding safety stock—say, an extra 50 units—you can handle these surprises without missing sales.
What are the risks of not having safety stock?
Skipping safety stock might seem like a way to save money, but it comes with serious risks:
- Lost sales. customers can’t buy what you don’t have.
- Negative reviews. stockouts frustrate customers and can lead to bad reviews.
- Lower search rankings. marketplaces like Amazon may penalize out-of-stock items.
- Damaged brand reputation. consistent stockouts make your store look unreliable.
- Rush shipping costs. you may pay extra to expedite orders from suppliers.
What are the downsides of too much safety stock?
While safety stock is essential, having too much can also hurt your business:
- Tied-up cash. excess inventory means money that could be used elsewhere.
- Storage costs. more stock requires more warehouse space.
- Obsolescence. products can become outdated or expire.
- Shrinkage. higher inventory increases the risk of loss, theft, or damage.
The goal is to find the right balance—not too little, not too much.
How do you calculate safety stock?
There are several methods to calculate safety stock, from simple rules of thumb to more advanced formulas.
Basic safety stock formula
A common formula is:
Safety stock = (Maximum daily usage × Maximum lead time in days) − (Average daily usage × Average lead time in days)
Step-by-step example
- Average daily sales. 10 units
- Maximum daily sales. 15 units
- Average lead time. 5 days
- Maximum lead time. 7 days
Plug into the formula:
Safety stock = (15×7) − (10×5) = 105−50 = 55 units
This means you should keep 55 extra units as safety stock.
When to use more advanced methods
As your business grows, you may want to use statistical methods that factor in demand variability and service levels. Inventory management software can help automate these calculations.
What are the factors that affect safety stock levels?
Several factors influence how much safety stock you need:
- Demand variability. the more unpredictable your sales, the more safety stock you need.
- Lead time variability. if your suppliers are inconsistent, increase your buffer.
- Supplier reliability. reliable suppliers mean you can keep less safety stock.
- Product type. fast-moving or high-value items may need more safety stock.
- Seasonality. increase safety stock before peak seasons or promotions.
- Order frequency. if you order frequently, you may need less safety stock.
Safety stock and the reorder point
Safety stock works hand-in-hand with your reorder point. The reorder point is the inventory level at which you place a new order. It’s calculated as:
Reorder point = (Average daily usage × Lead time in days) + Safety stock
This ensures you always have enough stock to cover demand during the lead time, plus a buffer for surprises.
Real-world example of safety stock
Let’s say you run an online store selling fitness trackers. Your average weekly sales are 200 units, but during New Year’s (a peak season), sales can jump to 350 units. Your supplier usually delivers in 7 days, but sometimes takes up to 10 days.
- Average daily sales. 200 / 7 ≈ 29 units
- Maximum daily sales. 350 / 7 ≈ 50 units
- Average lead time. 7 days
- Maximum lead time. 10 days
Calculate safety stock:
Safety stock = (50×10) − (29×7) = 500−203 = 297 units
Set your reorder point:
Reorder point = (29×7) + 297 = 203 + 297 = 500 units
This means you should reorder when your inventory drops to 500 units, ensuring you have enough to cover both regular demand and unexpected spikes.
What are some common FAQs about safety stocks?
Q. How often should I check or update my safety stock levels?
It’s a good idea to review your safety stock at least every few months, or whenever you notice changes in your sales, supplier delivery times, or if you’re planning for a busy season. If your business is growing quickly or you add new products, check your safety stock more often.
Q. Can I use software to help with safety stock?
Absolutely! Many inventory management tools can track your sales, monitor your stock, and even calculate safety stock for you. This saves time and helps you avoid mistakes that can happen with manual tracking.
Q. What if I have a lot of different products?
If you sell many items, focus on your bestsellers or products that are hard to restock quickly. You don’t have to calculate safety stock for every single product right away. Start with the most important ones and expand as you get more comfortable.
Q. Is safety stock the same as buffer stock?
Yes, both terms mean the same thing. They refer to extra inventory you keep on hand to protect against surprises in demand or supply.
Q. What should I do if my supplier’s delivery times change a lot?
If your supplier is sometimes fast and sometimes slow, you’ll need a bigger safety stock to cover those delays. Try to talk with your supplier to understand the reasons for the delays and see if they can be more consistent.
Q. How do I know if I have too much or too little safety stock?
If you’re often running out of products, you probably need more safety stock. If you have a lot of unsold inventory sitting around, you might have too much. The goal is to find a balance so you can meet customer demand without tying up too much money in extra stock.
Q. Do I need safety stock if I use dropshipping?
With dropshipping, you don’t keep inventory yourself, so safety stock isn’t something you manage directly. However, you should still keep an eye on your suppliers’ stock levels and reliability to avoid disappointing your customers.
Summary
Safety stock in order fulfillment is the extra inventory you keep on hand to prevent running out of products when there are unexpected spikes in demand or delays from suppliers.
