Revenue lost from stockouts is often coupled with the loss of customers who find the items elsewhere and often never return to the business. Stockouts also reduce the supply chain’s overall efficiency.

Running low on stock is an inevitability, but it doesn’t have to disrupt business. Learning how to calculate safety stock and keeping adequate amounts on hand ensures that the supply chain runs smoothly despite stocking delays and temporary outages. However, there are some essential guidelines that operational decision-makers need to understand to optimize safety stock in a way that supports overall business objectives.

What Is Safety Stock?

Stock inventory usually consists of cycle stocks, or the inventory that is expected to be sold within a given period, and safety stock. Safety stock acts as a buffer amount that accounts for uncertainties such as:

  • Excess demand
  • Supplier delays
  • Inaccurate demand or inventory forecasts
  • Failure to place timely reorders
  • Financial constraints

Safety stock mitigates the risks and consequences of stockouts, allowing your supply chain to proceed as usual even after cycle stock runs out.

Key Takeaways

  • Safety stock is extra inventory held to mitigate the risk of stockouts due to uncertainties in supply and demand.
  • Calculating optimal safety stock levels involves factors such as lead time, demand variability, and service level targets using various formulas.
  • Effective safety stock management requires ongoing monitoring, adjustment, and coordination with overall inventory optimization efforts, ideally supported by inventory management software.

Why is Safety Stock Important?

Safety stock helps businesses maintain a high level of customer service by reducing the likelihood of running out of inventory. When customers consistently find the products they need in stock, they’re more likely to have a positive experience and remain loyal to the brand. Conversely, stockouts can lead to lost sales, frustrated customers, and a tarnished reputation in the market. Safety stock also helps businesses navigate the inherent uncertainties of supply and demand. Many factors can impact the availability and lead time of raw materials or finished goods, from unexpected spikes in customer orders to supply chain disruptions, like natural disasters or labor strikes. Extra inventory serves as a buffer against these risks, allowing companies to minimize the operational and financial impact of such disruptions.

Furthermore, safety stock can help businesses optimize their overall inventory management practices. By analyzing the factors that drive the need for safety stock, such as lead time variability, demand forecasting accuracy, and service-level targets, companies can identify opportunities to improve their supply chain efficiency and responsiveness. This might involve strategies like diversifying suppliers, improving demand-planning processes, or investing in more advanced inventory management technologies.

How Can Safety Stock Improve Inventory Management?

Effective inventory management relies on the cushion that safety stock provides. Tracking current stock levels accurately while considering present and future market conditions and accounting for supply lead times is just the start of effective inventory control.

Excellent inventory management requires coordinating cycle stock and safety stock to ensure that inventory levels stay in line with demand and supply, making inventory management straightforward and more consistent.

Why Do Businesses Need Safety Stock?

Running out of stock is an expensive issue for businesses across the globe. Stockouts result in $984 billion worth of lost sales worldwide, with North American companies alone losing $144.9 billion, according to a study by IHL Group.

There are several reasons businesses should have safety stock on hand, and it can quickly prove its value when the unexpected strikes. Below are many of the biggest reasons to have this extra inventory.

10 Reasons to Keep Safety Stock


  1. Offset Demand Uncertainty

    Fluctuations in demand are among the primary reasons to maintain safety stock. Many factors can influence spikes in demand, including seasonal impacts, sudden shifts in customer trends, panic buying or a competitor’s departure. Safety stock gives companies enough breathing room to replenish stock while meeting this increased demand.

  2. Avoid Stockouts

    Safety stock can help companies reduce the risk of completely running out of a certain product and prevent operations from coming to a halt while the business locates, purchases, and delivers this inventory. That process can take days, or even weeks, making safety stock an invaluable bridge that keeps the business running while resolving the stockout.

  3. Minimize the Effects of Supply Disruptions

    Unexpected disruptions on the supplier side, such as raw material shortages, production issues, legislative or political measures, and operational shutdowns can have a major impact on your inventory levels. These interruptions have far-reaching effects on the rest of the supply chain, including delaying the completion of other product components, derailing customer delivery schedules, or causing retail disruptions. Safety stock mitigates the impact of supplier interruptions and lead time uncertainty and keeps the supply chain moving until the disruption passes or the company has found a new supplier.

  4. Reduce Administrative and Staff Hours

    Beyond keeping each step of the supply chain running smoothly, safety stock also cuts down on time spent on communication, paperwork, and warehouse duties. Supply chain managers won’t find themselves scrambling to find and reorder additional stock with an adequate buffer in place, allowing them to avoid all of the calls, emails, rush requests, and invoice processing that comes with that type of fire drill. Likewise, warehouse staff won’t have to unexpectedly unload trucks and restock racks, which can interrupt other day-to-day warehouse activities.

  5. Compensate for Forecast Inaccuracies

    Maintaining adequate safety stock ensures consistency and allows decision-makers to develop more accurate forecasts across the organization. Although demand forecasts are usually reliable, sudden changes can cause them to become inaccurate. The effect of stock disruptions compounds in other forecasts, such as supply chain staff scheduling. These issues are especially troubling when stock disruptions cause a loss of revenue or customers as sales and other financial forecasts become invalid.

  6. Limit Rushed Shipping

    A lack of inventory can result in lost revenues, but that isn’t the only cost that businesses incur. Increased administrative and warehouse payroll costs are also likely, as is the risk of suppliers charging a premium for rushed delivery. These costs may not be a big problem if the stockout results from an ongoing surge in demand. However, for stockouts caused by temporary disruptions or other issues, the extra cost may not be recouped quickly, if at all.

  7. Ensure Customer Satisfaction

    Safety stock is one of the best ways to sustain customer satisfaction and loyalty. If customers can rely on a company to always have what they need in stock, they will not only keep coming back but likely provide valuable word-of-mouth advertising as well. That pays off in a big way over the long term and helps your business grow.

  8. Maintain Market Share

    Being unable to meet demand and losing customers often also means losing market share. Mitigating the risk of stockouts is a significant part of sustaining customer satisfaction and reducing the risk of losing ground to competitors.

  9. Increase Efficiency

    Safety stock allows for more efficient operations, even during supply disruptions. Suppliers aren’t rushed, warehouse staff isn’t over-worked, delivery drivers stay on schedule, and your business can maintain a stream of trustworthy inventory numbers for reporting and forecasting purposes.

  10. Improved Supplier and Retailer Relationships

    Stockout situations often result in urgent reorders, but most suppliers don’t like to be rushed because of the disruption it can cause to their operations. Keeping safety stock on hand reduces the need to put in rush orders and provides suppliers with a predictable workload. Likewise, companies that work with retailers can maintain good relationships by keeping the items they sell in stock.

How to Calculate Safety Stock

Safety stock is about more than just having a few extra units available. Different formulas help inventory managers determine how much safety stock they need and take into account some critical variables. Here are some of the more common formulas, which are explained in greater detail further below.

  • Safety stock = (Maximum amount of sales x Maximum lead time) – (Average amount of sales x Average lead time)
  • Standard deviation safety stock = Z × σLT × D avg.
  • Safety stock with a variable lead time = Z x Average sales x σLT
  • Economic order quantity = √DS/H
  • Reorder point = (Average stock depletion in given period x Average lead time) + Available safety stock
  • Inventory position = Inventory on hand – Backorders + Inventory currently on order

Basic Safety Stock Formula

The basic safety stock formula provides a simple way to calculate the amount of extra inventory a business should carry to account for potential variations in demand and lead time. This formula considers the difference between the maximum expected sales and lead time and the average sales and lead time. By multiplying the maximum sales by the maximum lead time, the formula accounts for the worst-case scenario, where demand and lead time are both at their highest. Similarly, multiplying the average sales by the average lead time represents the typical scenario. The difference between these two scenarios gives an estimate of the additional inventory needed to cover potential spikes in demand or delays in supply. While this basic formula can provide a rough starting point, businesses often use more advanced safety stock calculations that factor in additional variables, such as desired service levels and statistical forecasting models.

The formula for calculating safety stock is:

Safety stock = (Maximum amount of sales x Maximum lead time) – (Average amount of sales x Average lead time)

Standard Deviation Safety Stock Formula (Greasley’s Method)

This safety stock formula is helpful when dealing with multiple uncertain variables. The formula is expressed this way:

Standard deviation safety stock = Z × σLT × D avg.

  • What is Z? Z represents the number of orders that a company expects to fulfill in the given period.
  • What is σLT? σLT represents the standard deviation of the lead time, but calculating it requires some complicated math. Fortunately, standard deviation calculators allow users to input their variables and determine the standard deviation of a data set. For safety stock, the variables to enter are the lead times for each inventory order within the given period.
  • What is D avg.? D avg. represents the average amount of demand within a given period. For safety stock purposes, it’s most common to find the average daily demand. To do this, add the number of sales made in the given period and then divide that figure by the number of days in that period.

Safety Stock with Variable Demand Formula

The safety stock with variable demand formula is best for situations where the lead time is reliable, but the demand varies.

Safety Stock with Variable = Standard deviation of demand x Square root of average delay

As with the standard deviation, there are online tools that can accurately calculate the average of a set of numbers and calculate the square root of a figure. To find the average delay, take the supplier orders that took longer than average to arrive, add those figures together, and then divide the resulting sum by the number of orders that took longer than average to arrive.

Safety Stock with a Variable Lead Time

This calculation is for situations where demand is stable but lead-time fluctuates:

Safety stock with variable lead time = Z x Average sales x σLT

As before, "Z" represents the desired service level and "σLT" represents the lead time deviation (see the standard deviation formula for more information on how to calculate those).

Heizer & Render’s Formula

This formula, named after operations management experts Jay Heizer and Barry Render, calculates the amount of safety stock required to achieve a specific service level, which represents the probability of not running out of stock during a replenishment cycle. The Z-score is a statistical value that corresponds to the desired service level, with higher Z-scores indicating a higher level of protection against stockouts. The standard deviation of lead time demand (σLT) measures the variability of demand over the lead time period, taking into account variations in demand and lead time. By multiplying the Z-score by the standard deviation of lead time demand, this formula determines the amount of extra inventory needed to buffer against this variability and maintain the desired service level.

Heizer & Render’s formula is a more advanced approach to safety stock calculation that requires a deeper understanding of statistical concepts and more robust data on demand and lead time variability. It can be determined using this calculation:

Safety stock = Z × σLT

Complementary Formulas

These equations provide additional information to supplement safety stock calculations. They can be used to ensure that each aspect relating to safety stock is accounted for.

Safety Stock with EOQ (Economic Order Quantity)

Economic order quantity (EOQ) is the ideal amount of stock a business should purchase to minimize inventory costs. It’s useful when a company wants to minimize costs such as ordering, transportation and storage. The formula is written out as:

Economic order quantity = √DS/H

"D" represents the demand for stock in a given period, "S" is the costs of these orders, and "H" represents the holding costs per item within the period.

Lead Point Demand

The lead point formula calculates the expected demand during a lead time period, which is the time that passes between placing an order and receiving the inventory. The average lead time represents the typical number of days, weeks, or months it takes for an order to arrive, while the average daily usage represents the typical amount of inventory consumed or sold each day. By multiplying these two values, the lead point demand formula determines the total amount of inventory that is likely to be needed during the lead time period.

This calculation is important for setting reorder points and ensuring that new inventory arrives before the current stock is depleted. It helps businesses avoid stockouts by considering the time it takes for replenishment orders to be fulfilled. However, the lead point demand formula provides an average estimate only and doesn’t account for variability in demand or lead time, which is where safety stock calculations come into play. Lead point can be calculated using this formula:

Lead point demand = Average lead time × Average daily usage

Reorder Point Formula

This calculation helps companies determine the inventory level that would require dipping into safety stock:

Reorder Point = (Average stock depletion in given period x Average lead time) + Available safety stock

The reorder point is the optimum time to reorder stock before it’s entirely gone, reducing the risk of stockouts.

Inventory Position Safety Stock Formula

This formula helps companies monitor net inventory, which is stock on hand minus any backorders:

Inventory position = Inventory on hand – Backorders + Inventory currently on order

The resulting figure should be higher than the reorder point to avoid running out of stock.

How to Choose the Right Safety Stock Formula

Knowing which safety stock formula to use can depend on several factors, including:

  • How fast the inventory moves
  • Current and forecasted demand
  • Current and forecasted sales volume
  • Supplier lead times

The basic safety stock formula is a good starting point for most businesses as it provides a serviceable ballpark estimate when specifics about the above variables are unknown. For companies with a better idea of these inventory particulars, the more complex formulas are of greater use to pinpoint safety stock levels.

Safety Stock Example Calculation

Let’s consider a clothing retailer that sells popular T-shirts. Here are the important data points needed to calculate an appropriate safety stock:

  • Maximum daily sales: 100 units
  • Maximum lead time: 7 days
  • Average daily sales: 60 units
  • Average lead time: 5 days

Let’s plug these numbers into the basic safety stock formula:

Safety stock = (100 x 7) – (60 x 5) = 400

In this scenario, the clothing retailer should maintain a safety stock of 400 T-shirts. This safety stock level accounts for potential spikes in demand (up to the maximum daily sales) and possible delays in delivery (up to the maximum lead time). By keeping 400 units as safety stock, the retailer can better manage unexpected increases in demand or supply chain disruptions and reduce the risk of stockouts while balancing inventory costs.

Common Safety Stock Challenges & Risks

Safety stock is a valuable tool to combat stockouts, but it can have some disadvantages. There are a few factors inventory managers need to consider when developing safety stock strategies.

  • Setting safety stock to zero:

    Many supply chain managers attempt to combat the costs of having too much stock on hand by setting the safety stock to zero. This is especially common when an unexpected spike in demand subsides and demand returns to a normal level. While it solves the issue of having too much inventory, it reignites the risk of not having a buffer to handle any further fluctuations in demand or supplier delays, which can be even costlier.

  • Safety stock is static:

    Safety stock doesn’t grow with the business, meaning the number of units currently earmarked as safety stock may not be enough as the business expands. Inventory managers should review bottlenecks and safety stock numbers regularly and adjust the amount as necessary.

  • Too much safety stock:

    Carrying safety stock is often necessary to avoid losing sales to stockouts, but there’s no denying that it reduces the company’s available cash. Having an excess of safety stock can mean less room for current cycle stock or new products. It’s also a considerable business expense, as holding costs often represent 20% or more of the inventory’s total cost. Much of this expense comes from the additional amounts that have to be purchased and increased storage costs and staff hours.

  • Standard safety stock formulas:

    The standard safety stock formulas may not work for all industries or operational strategies, especially when there are numerous unknown variables. These formulas should be tweaked to fit individual businesses and situations to provide the most reliable calculations.

  • Letting safety stock decline

    It’s tempting for supply chain managers to decrease the amount of safety stock as average lead times go down. However, besides long lead times, other factors can cause inventory issues, so keeping adequate safety stock should be a priority.

  • Overuse of safety stock:

    Safety stock is a good shield against stockouts, but it’s not a cure-all for inventory issues. Supply chain managers must determine the optimal amount of safety stock for each item and find a careful balance between the risks and costs of stockouts compared to the risks and costs of having too much stock on hand.

Safety Stock Examples

Here’s how safety stock works in practice: A snow shovel manufacturer knows that demand is low during the warmer months but can fluctuate significantly in the winter depending on several hard-to-predict aspects of the weather. For this reason, the inventory manager can decide to set aside a portion of each type of snow shovel it sells (e.g., heavy-duty for significant snow, metal shovels for ice and more) to ensure that the company can meet demand across the board.

As another example, a bicycle manufacturer was recently featured in a popular biking magazine and experienced a sharp uptick in orders. As the manufacturer fulfilled orders, inventory was depleted faster than the average lead time, increasing the risk of a complete stockout. Without safety stock, the company would not have been able to fulfill orders once the regular inventory was depleted, leading to lost sales.

Manage and Calculate Safety Stock With Inventory Management Software from NetSuite

Many supply chain managers rely on inventory management software and built-in or complementary demand planning tools to calculate optimal safety stock levels and reduce the chances of having too much — or not enough — buffer inventory. Businesses can also centralize supply chain functions on an enterprise resource planning (ERP) system from NetSuite for better planning and collaboration between operational units. Advanced analytics capabilities offered by leading ERP software can improve forecasts’ reliability, accounting for demand and supply fluctuations. That reduces the chances of holding excess safety stock and can reduce the need for safety stock by optimizing inventory management across the board. In short, this software can perform every task required to calculate and manage safety stock accurately and improve overall operational efficiencies.

There is a myriad of benefits to keeping safety stock, primarily the ability to keep operations flowing even when there are inventory disruptions. However, it’s important to avoid excessive safety stock as too much can hurt the business more than it can help. Formulas can help figure out the right balance, but assessing and achieving the optimal safety stock level requires comprehensive information about the entire supply chain — and inventory management software takes the manual processes out of the equation, sometimes literally, helping companies maximize sales, minimize disruptions, optimize safety stock, and drive profits.

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Safety Stock FAQs

What is a good safety stock level?

The optimal level depends on several factors, including inventory velocity, current and future demand, sales volume, and supplier lead times. As a rule of thumb, the safety stock amount should be the amount of inventory used per day multiplied by the lead time in days.

What is the difference between buffer stock and safety stock?

While the terms are generally used interchangeably, in some industries, "buffer stock" refers to excess inventory covering variations in demand, while the safety stock definition refers to excess inventory held for supplier delays or other internal variations.

What is the importance of safety stock?

Safety stock is one of the easiest ways to avoid running out of stock and not fulfilling orders. Without it, businesses would lose sales and, ultimately, customers.

What is the 50% rule in safety stock?

The 50% rule in safety stock suggests that half of the difference between the maximum and the average lead time consumption should be held as safety stock. This rule provides a simple and quick way to estimate safety stock levels without requiring extensive data analysis or complex statistical calculations.

How do you calculate the Z-score of a safety stock?

The Z-score for safety stock is determined by the desired service level, which represents the probability of not running out of stock during a replenishment cycle. You can find the corresponding Z-score for your desired service level using a standard normal distribution table, where common service levels like 95% and 99% correspond to Z-scores of approximately 1.645 and 2.326, respectively.