“Outof Stock”! is probably one of the worst things you can have as a ecommercebusiness. There’s customer demand but you can’t serve. This is lost money onthe table. With over 25 years of ecommerce history, stock is still fairlycommon even among large businesses.
In this post, we will talk about setting up the right safety stock for your e-commerce business. We will cover,
- How to structure your existing Inventory data
- How to calculate Safety stock level based on your sales
- How to get alerted when the safety stock hits
- Understanding your procurement timelines
- Process to follow when the Safety Stock level is hit.
What is Safety Stock?
Safety stock refers to the extra inventory you keep on hand to act as a buffer against stock outs during uncertainties in supply and demand.Safety stock helps you meet customer demand even when your sales unexpectedly spike or there are supplier delays. The goal of maintaining safety stock is to achieve a desired service level - the percentage of time you can immediately fill an order from stock on hand.
In simple terms,
Safety stock = Avg no of inventory items to be sold before Procured products reach your warehouse.
Structuring Your Existing Inventory Data
Your safety stock depends on your sale velocity. So, you need to have a clear idea of how much you’re selling. You need the following data points for each inventory item to correctly identify Safety Stock.
1. No of items sold in a day
2. Avg time taken for PO Placement
3. Avg time taken for PO Acceptance
4. Avg time taken for PO delivery
Here’s a simple formula to calculate this:
Safety Stock Level for Inventory (I) = (PO Placement days + PO Acceptance days + PO Delivery days) * Items sold in a day
Here’s a live calculator where you can upload these data points to get the required result.
Setting Safety Stock Alerts
You may not always know when your safety stock is getting hit. And going through a report every day is very sub optimal. Proactively monitoring your inventory and setting alerts can help ensure you don't run out of key products. Here are some tips for monitoring safety stock:
· Use a Monitoring solution to proactively monitor for Safety stock hits
· Build a simple dashboard to view daily inventory levels and flag low stock items that have fallen below safety stock.
· Set alerts for when lead times increase from suppliers so you can act before safety stock is depleted.
· Alert the purchasing/sourcing team when safety stock needs replenishment so they can take action.
Actions to Take When Safety Stock is Hit
Even with close monitoring, your inventory will occasionally dip below target safety stock levels. Here are some actions to quickly respond:
· Rush order from the supplier to replenish stock if lead timeallows.
· If lead time is too long, source from a secondary supplier even at a premium price.
· Temporarily stop promotions or ads on the low stock item to minimize further sales.
· Offer alternative bundle deals or substitutions for the out of stock product.
· Communicate order delays or stock outs immediately and offer customers backorders or rain checks.
Proactively managing and monitoring your safety stock is crucial for maintaining high service levels and avoiding costly stock outs. Adjusting safety stock levels based on demand changes will improve your inventory performance over time. With some care and attention, safety stock can help your e-commerce business smoothly meet customer expectations.