Safety Stock: Retailer's shortcut to managing and forecasting errors
• Safety stock is buffer stock maintained to keep up with fluctuations in demand.
• It helps you avoid disruptions to the supply chain, shipment delays, and poor customer experience due to stockouts.
• The key to estimating and maintaining a safety stock is forecasting demand as accurately as possible.
ₐ Competitor intelligence in terms of price, promotions, and stock status can help you better forecast demand and estimate safety stock levels
In a market as competitive as retail, if you do not have stock of a product, chances are your customers can easily find and purchase similar products from your competitors. Considering 44% of new customers are likely to turn into repeat customers, once you lose a customer due to lack of stock, there is a significant chance that you might lose them for good.
This is where the concept of safety stock comes into play.
What is safety stock?
Safety stock, simply put, is buffer stock that businesses maintain to keep up with fluctuations in demand and avoid running out of stock. It’s important to keep in mind that there is a thin line between safety stock and excess stock and understanding it and estimating safety stock accurately is crucial to avoid losses.
Why is it important?
Provides protection against delays in the supply chain
Almost 40% of businesses in the US experienced delays in the supply chain during the pandemic. With the economy and market trends fluctuating and unforeseeable scenarios increasing, it is more important now than ever to maintain appropriate safety stock levels to ensure that your customer demands are always met.
Prepares you for fluctuations in demand
Viruses, weather woes, and nature’s wrath have kept us all on our toes. Unforeseen demand spikes have never been more frequent. Keeping a healthy buffer stock will help you stay prepared to handle such situations and give you a competitive edge.
Helps avoid stockouts
One of the biggest points of frustration for customers during retail shopping is products being out-of-stock. Research suggests that when customers find a product they are looking for is out-of-stock, they will leave without purchasing anything even if there are other things on their shopping cart or list. While it is impossible to forecast demand accurately, it is possible to stock a little over to avoid losing revenue due to such situations.
Lesser shipping delays and better customer experience
Nothing can ruin a post-shopping dopamine high like a backorder or shipment delay notification. Almost 40% of businesses will miss shipment deadlines due to a lack of stock. This will not only create a disruption in your supply chain but also result in poor customer experience and loss of revenue.
Factors that affect safety stock levels
The key to maintaining a safety stock is to estimate it as accurately as possible. If your safety stock is not enough, it will cause disruptions in the supply chain, shipment delays, and poor customer experience. On the other hand, if your safety stock is in excess, it will lead to losses and additional storage costs.
So, what should you consider when deciding the level of your safety stock?
The profit margin on the product
Whether you are a multi-brand retailer or an exclusive store, not all your products would bring in the same profit margin. While you might be tempted to have additional stock of the products with higher profit margins, if the volume of sales for these products is low, you will end up with excess or deadstock that’s taking up space.
On the other hand, if you sell a necessary product like cleaning supplies or flour that has a lower margin but higher sales volume, having a safety stock of this product will ensure both profit and customer satisfaction.
The segment of the product
Another factor that can greatly affect the level of safety stock is the product segment. Is the product a necessary product, a luxury product, or is it a product with seasonal demands aka seasonal product?
With necessary products, your margins might be low but the sales volume is quite high. These are also products that your customers need and are likely to buy from somewhere else if you run out-of-stock. A good level of safety stock in this segment is recommended to prevent this and keep your customers happy while also enjoying revenue.
On the other hand, if your product is a luxury one, the margin might be high for this product but the sales volume, not so much. These are also products that your customers might have to wait for or pre-order. These are products you can afford to maintain a low safety stock on.
How to manage your safety stock smartly
While there are many mathematical formulas that you can use to calculate safety stock levels, there is a bit of guesswork, or like we’d like to say, art involved.
What will help you best estimate the level of safety stock is understanding the products you have a market advantage on and when you have the market advantage on the product. A surefire way to do this is accurate data on past and current trends.
Pricechecker, although a price intelligence software, provides accurate data that can help you understand and forecast demand based on your competitor and customer behaviour in response to changes in season, trends, and prices.
For instance, if you see a higher demand for a product irrespective of price changes during a particular season, then you know you’ll benefit from maintaining a safety stock of this product during that season. Similarly, if you notice your competitor running out-of-stock on a product frequently, you can capture his market by having an additional stock of that product so you always have stock.
Pricechecker fetches accurate data regarding your and your competitors’ past and present price data and stock status and presents it in such a way that you can easily see, understand, and analyse trends and forecast demands, prices, and promotions for your product. Talk to us to see a demo and start your free trial.
