Safety stock
Demand moves every day and deliveries take time. Set lead time and service level and watch a simulated month of stock, orders and stockouts.
Example data. One product selling 40 units a day on average, ordered 280 at a time (a week of sales) whenever stock on hand plus stock on order falls to the reorder point. Sales you can't fill are lost.
Safety stock
44 units
Reorder point
244 units
Stockout days
0 of 30
0 units of sales lost
Average stock on hand
163 units
What the cushion costs to hold
Stock at the end of each day
A delivery arrives that morning.
The formula
Safety stock = z × σ × √L = 1.64 × 12 × √5 = 44 units
Reorder point = d × L + safety stock = 40 × 5 + 44 = 244 units
d is average daily demand, σ how much it varies from day to day (one standard deviation), L the lead time in days, and z the number of standard deviations that gives your service level: the chance that a delivery arrives before the shelf is empty (95% gives z = 1.64). Doubling the lead time doesn't double the safety stock, it multiplies it by √2. The formula assumes demand that varies randomly around a steady average. A promotion breaks that, which is why a forecast someone checked beats a bigger cushion.