Final answer:
Safety stock is extra inventory to prevent stockouts due to supply and demand uncertainties, calculated using maximum and average daily usage and lead times. The typical formula is Safety Stock = (Maximum daily usage × Maximum lead time) - (Average daily usage × Average lead time).
Step-by-step explanation:
The term safety stock refers to a level of extra inventory that is maintained to mitigate risk of stockouts caused by uncertainties in supply and demand. The formula to calculate safety stock generally involves the following components: the maximum daily usage of items, the maximum lead time, the average daily usage, and the average lead time. An example of a safety stock formula could be:
Safety Stock = (Maximum daily usage × Maximum lead time) - (Average daily usage × Average lead time)
This calculation helps determine the appropriate amount of safety stock needed to meet customer demands without experiencing shortages, while not overstocking and thus increasing inventory holding costs.
The safety stock formula is used to calculate the amount of additional inventory a company should hold as a buffer to meet unexpected demand fluctuations or supply disruptions. The safety stock formula is:
Safety stock = (Z * σ * LT) + (Z * δ)