The purpose of safety stock is to limit stockouts. The items give you time to replenish products while avoiding costs like lost sales during stockouts. They act as a buffer between forecasted quantities and demand levels. The framework limits the impact of demand fluctuations. The variations can occur due to many reasons, including stockout at a supplier level or seasonality changes. Inaccurate forecasting can also cause stockouts. Calculate the safety stock level for each item. Safety stock is critical for products with a high level of demand variability. Check out our article on XYZ analysis that discusses how to categorize products using demand fluctuations.

The formula for calculating safety stock is Safety Stock = (Maximum Daily Sales x Maximum Lead Time) – (Average Daily Sales x Average Lead Time). You can find the Maximum Daily Sales by checking your previous data over a period, for example, a quarter, etc. The Maximum Lead Time is the longest time to have products delivered during the same period. Add the daily sales over the period and divide it by the number of days making up the interval. Calculate the average lead time by adding up the time it took to deliver various orders during the interval and dividing by the number of deliveries made during that time.

Safety stock levels also cover stockouts due to loss, damage, or shrinkage. Shrinkage is inventory lost due to stealing. There are many other ways of calculating safety stock levels. Safety stock levels link to the Reorder Point through the formula Reorder Point = Safety Stock + Average Sales x Lead Time. You can check out our article on the Reorder Point for its calculating formula. Consider that safety stock can point to critical challenges in how you manage ordering at your pharmacy. Take time to understand what is driving the need for safety stock.

Could it be that the data you are using needs to be more accurate? How accurate is your forecasting? Do you have IT systems to help you get accurate data? If you have digitized your ordering system, how updated is it? Does the software you use automatically generate reports to automate calculating safety stock or is it a semi-manual process? How’s your communication with suppliers? Are your negotiations with suppliers work to your advantage? The answers to the questions can help you know whether your safety stock level is accurate or whether it covers fundamental challenges within your ordering process.

Other challenges that safety stock can cover include working with unreliable suppliers who may be affecting lead times. Production or importing challenges can impact safety stock levels. Could it be that your logistics partner is failing to deliver on time if the deliveries are being handled by your pharmacy from the suppliers? Safety stock levels can also cover a lack of skills and training in managing inventory. The right safety stock balance impacts customer service positively. Consider using software with AI prediction capabilities for better forecasting. Machine learning capabilities can be a game-changer in optimizing safety stock levels.