Ever heard of a product being out of stock?
This is the situation whereby a store or chain of stores does not have a product in inventory and the good thing is he does not have any demand for it from his customers.
However, this beneficial scenario is most frequently confused with a very close term stock-out. When a stock-out scenario occurs, contrary to out of stock scenario, customer still places demand for a particular goods. However, since the product is not available in the company's inventory he is unable to satisfy the customer when the demands for the goods are raised.
Although it may not seem to have any direct monetary impact on the company it does have a negative effect on the retail business. When a customer is unable to find a particular product he wants he most often leaves the store unsatisfied. This is more likely to take the customers business elsewhere, hence effecting the retail business in the long run.
See also The Cost Of Retail Inventory.
Stock-out situation does not depend on your company only. Quite some times producers are unable to shop the right quantity of products due to shortage of raw materials, some other production delays or problem with their shipments. Either way, the result is all the same, you end up with little or nothing to satisfy your customers with.
Supply chain professionals consider a number of scenarios to determine the optimum level of safety stocks. Some companies consider the costs involved in having the safety stock which includes the cost of storage, the depreciation of the product and its shelf life. Whatever your cost of having the safety stock is it is considerably less than the cost incurred by losing your customers depending on the type of product you are selling.
Usually safety stocks are calculated via statistical data, fixed quantity or based on time period. Each of these are discussed below.
Statistical based
This method employs normal distribution or bell shaped curve to determine the safety stock. In a normal distribution curve the middle point is the forecast and represents the average value. Moving away from the center would mean a deviation from the average and probability of a high deviation from the forecast and is represented by smaller percentage. A deviation of 48% would mean 2 % possibility.
Statistical methods are not always accurate. Although the method employs mathematical models it is difficult to predict retail business and customer behavior. A common example may be that statistical method may mention of having a particular amount of safety stock when in fact there may no longer be any demand of that product and hence no reason to manufacture.
Fixed Safety Stock
A retail company may decide to maintain a constant amount of safety stock. This is usually done with the help of production planner. The planner is usually developed based on the customer demand trend. What happens is whenever the stock level falls below the value it triggers a system and a replenishment order for a quantity of the product is generated. The quantity for replenishment is usually determined by the consumer demand. See Retail Inventory Management.
Time Period Based Safety Stock Determination
This is usually determined by the forecast for the demand of the product. Suppose a store sells 100 cases of a product a day. The stores safety stock will be determined by the number of products demanded each day times the number of days whose stock the stores wants to hold. So if the store wants to keep safety stock for seven days then the quantity of stock will be 700 cases.
No matter which means you use to calculate your safety stock there can be no way of ensuring that the quantity needed is in fact accurate. In order to reach an optimum level of safety stocks try to monitor the safety stock calculation periodically.