What’s Safety Stock? How Does It Affect Inventory Management?

What Is Safety Stock and Why Is It So Important?

Safety stock, also called buffer stock, is the stock you order additionally. Almost all companies will set up safety stocks to cope with emergencies. This kind of inventory helps reduce the risk of out-of-stock product sales, loss of sales, or the possibility of customer dissatisfaction.

The main purpose of safety stock is to ensure that there is enough stock for sale. Why is it necessary? Because in most industries, companies cannot determine 100% of the sales volume of a product in a given time.

Safety-Stock丨ChinaDivision
Safety-Stock丨ChinaDivision

Seasonal fluctuations in demand for products may require companies to hold safety stocks at certain times throughout the business cycle. Enterprises need to predict the supply speed, delivery frequency, and delivery time based on the supplier’s distance.

Intensified competition in online stores has caused businesses to pay more attention to changes in product demand. Because of the shortage of goods, your failure to deliver the goods as promised will drive customers to turn their attention to other stores. Nowadays, customers hate waiting. When they cancel an order, you will face the weakening of customer trust and competitors’ blow.

Although a certain degree of safety is needed, it must be emphasized that safety stocks come at a price. The greater the amount of safety stock held, the higher the cost of the company. These costs include warehouse rent, warehouse staff wages, security costs, and the cost of expired or obsolete inventory.

How Does Safety Stock Affect Inventory Management?

A strategic supply chain management system is vital to the success of product marketing and operations. This is related to product inventory management. Correct management measures are conducive to improving customer satisfaction, reducing operating costs, and bringing a stable cash flow to your business.

Inventory management is a reliable long-term investment. Effective safety inventory management can ensure your supply chain’s normal operation and maintain your company’s reputation without disappointing your customers.

How to Improve Inventory Tracking?Simple Guidance for You in Inventory Management

With the rapid development of third-party logistics, 3PL‘s advanced inventory management system can save you time and money.

However, for companies with relatively small business volume, in-house management is still required. Choosing the right inventory tracking method can help improve inventory accuracy.

What Are the Types of Inventory?

Before you can improve warehouse management, you need to understand the inventory types accurately. The following are the different types of inventory:

How-to-Improve-Inventory-Tracking?丨Lynda.com丨ChinaDivision
How-to-Improve-Inventory-Tracking?丨Lynda.com丨ChinaDivision
  1. Raw Materials, materials used to manufacture products
  2. Work-in-Progress, unfinished product being produced
  3. Finished Goods, finished goods stored in the warehouse, waiting to be sold or shipped
  4. Overhaul/MRO, maintenance, repair, and operation supplies, items used to support and maintain the production process and its infrastructure. These items are usually consumed due to the production process’s needs but are not directly part of the finished product. MRO inventory includes lubricants, cleaning supplies, gloves, packaging materials, and other supplies. It also consists of some office supplies, such as staples, pencils, copy paper, etc.
  5. Transit Inventory, the items have been loaded and are in transit.
  6. Anticipation Inventory, to meet the expected surge in sales inventory
  7. Decoupling Inventory, supplies, or products reserved in anticipation of stagnation in some production links
  8. Cycle Inventory, products shipped from a manufacturer or supplier to a company, and then sold to customers immediately
  9. Theoretical Inventory, the inventory rate in and outreaches a balanced ideal state, and inventory products can pass through the manufacturing system’s minimum stock without waiting. But in reality, the warehouse will always have some inventory (such as MRO inventory, decoupling inventory, etc.)

What inventory tracking method is the optimal solution?

Manual tracking

You must complete the inventory count for the outbound and inbound warehouse inventory in the manual tracking system. Besides, any updates to inventory records require manual operations. You can manually copy the item number and any other relevant details, but this inventory tracking method can be time-consuming and has a higher error rate. But one advantage is that you don’t have to pay for barcode scanners and other expensive equipment.

Barcode and QR code tracking

Bar codes or QR codes are commonly used in inventory tracking. The inventory system automatically extracts detailed information by scanning the product barcode or QR. The administrator can quickly and easily change the information in the system. This inventory tracking method can achieve efficient inventory management, so 3PL service providers usually recommend this method.

RFID tracking

As with barcode and QR code tracking, you can use RFID tracking to scan products and automatically extract their detailed information. The main difference between RFID and other scannable codes is the technology behind them. RFID tags scan more comprehensively, so they are very useful for inventory systems that move many products. However, only a few inventory management software supports RFID tracking because it requires specialized (expensive) tags and scanning equipment.

How Inventory Management Techniques Can Increase Your Profit!

Why is inventory management important?

Inventory management helps reduce operating costs

Enterprise daily operating costs include the staff salary, warehouse rent, storage cost, logistics cost, and so on a series of spending. Inventory management techniques can help you minimize losses.

Inventory means that you store a valuable and limited resource in the warehouse, and you can make it cash only by selling this resource.

For the following types of inventory you need to sell in time:

Products with shelf life that are prone to spoilage: food, medicine, cosmetics, etc. If these products are not sold in time, they will deteriorate and need to be discarded in time.

Outdated products: Outdated phone covers, clothing, or shoes that were popular last year, etc. Such slow-moving goods will occupy a certain amount of inventory space for storage.

To minimize storage costs, you can take certain measures and technologies to achieve efficient inventory management and lower inventory levels.

Effective inventory management techniques are listed below:

Inventory-Management-Techniques丨Unleashed-Software丨ChinaDivision
Inventory-Management-Techniques丨Unleashed-Software丨ChinaDivision

First In First Out (FIFO)

First in first out (FIFO) is an inventory management method widely used worldwide. This method means that the first batch of goods entering the warehouse is also the first batch of products sold.

For example, supermarkets or some small shops will place the latest date of yogurt at the end of their shelves.

But what are the limitations of this technology?

Some products are not suitable for this inventory management technique. For example, red wine. Retailers like to store this kind of goods because they do not have strict shelf-life requirements. Although FIFO can better and more accurately value the inventory on the balance sheet, products such as wine are not so accurate.

inventory-management丨Mitrah-Technology丨ChinaDivision
inventory-management丨Mitrah-Technology丨ChinaDivision

ABC inventory management

ABC classification is also a commonly used inventory management technique, which usually divides inventory resources into three categories:

Class A inventory control is the most stringent and requires accurate records,
Class B inventory control is slightly strict and appropriate records,
Class C inventory control is the simplest and least record.

What are the benefits of this inventory management technique?

ABC analysis is a method of identifying inventories that have a significant impact on the overall inventory cost. There are different controls for each type of inventory.

In other words, each inventory does not have the same value. Dividing inventory into categories A, B, and C can help you determine their respective importance to your business.

First, Class A stocks are critical, often high-value and high-margin items that require regular and frequent inspections; B is next; Class C belongs to the lowest value, so you just need a little attention. First, Class A stocks are critical, often high-value and high-margin items that require regular and frequent inspections; B is next; Class C belongs to the lowest value, so you just need a little attention.

So, how to allocate A, B, C inventory?

There is no clear ratio, everything depends on the goals and standards you set.

According to the Pareto principle, 20% of products bring 80% of revenue. The ratio of ABC’s three inventory is rough as follows:

Class A inventory—accounting for 30% and 60% of total revenue
Class B inventory—accounting for 50% and 30% of total revenue
Class C inventory—accounting for 20% and 10% of total revenue