The importance of safety stock in your wholesale business

You can improve your replenishment process or reorder points for all you want, but there are times when the actual demand or supply will nullify your estimations and you will find your business getting out of stock. It doesn't matter if you are a manufacturer, distributor, wholesalers, or retailer, finding out that you are about to get out-of-stock is never a pleasant information (in spite of the fact that some businesses will prefer it over ending up with overstock). The fact of the matter is that getting out-of-stock can result in serious interruptions, and eventually loss of business. For manufacturers, it can halt the production process, for wholesalers and retailers it may result in dissatisfaction amongst their customers.
To save themselves from this situation, businesses maintain a safety stock which is also known as buffer or cushion stock, since it provides a cushion against getting totally stock-out. If you are running a business where the demand or supply can rise or drop to abnormal levels within a short space of time, then probably you should maintain a safety stock to save yourself from these situations.
On the other hand, keeping a safety stock can prove to be too costly for small businesses, because of the costs involved in purchasing and storing the inventory (especially because safety stock is mostly a non-moving stock). Wholesale businesses, which are already looking to cut costs, might not appreciate the idea of spending their (already limited) capital on safety stocks.
Usually, safety stock is necessary when you are entering into a new business or a new market, once you get more familiar with the demand and supply; you can improve the accuracy of your demand forecasting and minimize the need of safety stock. However, no matter how accurate your forecasting is, certain mishaps or incidents can take place, resulting in your supplies getting blocked, so you need to keep these events in mind.
There is no recommended formula for calculating the minimum required level of safety stock for a wholesale or retail business, and each business can choose to use their own formula for safety-stock. Coming up with the minimum level of safety stock requires you to look at the lead time, and the time alternative supplies will take. Also remember, that you need to review your safety stock on quarterly or yearly basis, and make adjustments (unless you’ve got some computerized program for safety stock level that automatically adjusts according to the demand).

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