While COVID-19 is a global health crisis affecting thousands of people around the world, significant economic impacts are expected to continue in the future.
From a Supply Chain perspective, companies should carefully monitor demand and inventory to meet the loss of production as a precaution to future factory closures and economic recession.
Most companies face stock-outs while their customers are in quarantine around the world. Therefore, they must take the necessary steps to supply the required stock and meet the demand of their customers.
All companies, without exception, want to guarantee their sales and for this they need to have the right product at the right time, in the right amount and in the right place.
At this point, it is necessary to understand the importance of inventory security and consult inventory management companies. Because inventory plays a critical role in increasing a company’s profitability.
Below, we’ve answered a compilation of frequently asked questions and answers on Supply Chain and inventory management during the COVID-19 process.
HOW CAN YOU CONTROL SAFETY STOCK?
Safety stock is the amount of additional stock that companies hold to minimize the risk of out of stock.
However, being overly cautious can result in cost increase and stock obsolescence from overstock: both reduce your profitability. So, what factor should you consider when determining the optimal safety stock level?
WHY DO YOU NEED SAFETY STOCK?
We know that toilet paper was running out in many cities within a few days in the first month of COVID-19. Although this may seem like a success for companies making sales, it quickly caused many customers to be disappointed.
So, should the retailer keep more inventory safety stock to meet this unexpected demand? Is it possible to plan such a large fluctuation in demand ahead of time? Probably yes.
As a result, determining the optimal safety stock depends on the balance between service level, stock capital and risk.
WHAT FACTORS SHOULD BE CONSIDERED TO DETERMINE THE SAFETY STOCK?
Even if the most accurate sales forecast has been calculated, there will always be some difference between actual sales. Also, your suppliers may not always be able to deliver your order on time or in the agreed quantity.
The purpose of the safety stock is to secure your stock against sudden changes in the demand and supply curve in order to reach the targeted service level.
While there are many factors that affect the need for safety stock, according to best inventory management companies, there are 4 main factors to consider:
- Fluctuation in demand
- Lead times and supplier reliability
- Targeted service level
- The “real” risk of out of stock
WHAT ROLE DOES UNCERTAINTY IN DEMAND PLAY IN DETERMINING THE SAFETY STOCK LEVEL?
Let’s assume that the sale of a product is 100 units per month. It will be easy to stock enough to meet this amount.
However, the truth is that demand will vary significantly from month to month. Even if the average monthly sales amount is 100 units, the actual sales amount may vary.
For this reason, it is inevitable that you will encounter situations such as out of stock or overstock before establishing a balance in your stock level by ensuring the optimal level of safety stock.
In other words, for products with a consistent sales profile for any service level, the need for safety stock may be minimal. However, for products with a more erratic trend, the safety stock requirement will be much higher.