Safety Stock

One of the factors of finding the Order Point for an item is Safety Stock, which serves as an insurance against stock outs and which helps counteract fluctuations in lead times or demands, as well as increasing your level of service.

A rough formula for calculating Safety Stock is to take half of the sum of your lead time (in days) multiplied by your daily demand (the number of units sold per day). Thus, if you sell twenty widgets per day and your lead time is eight days, your Safety Stock for the item would be 80.

Once you have your Safety Stock number, your Order Point can be calculated using the following formula: Safety Stock + (lead time X daily demand), or in the case of the above example, 80 + 160 = 240.