Safety stock in inventory is like the last few dollars you must save before the recession starts. These are the last few products you have in inventory before you reorder to fulfill the customer demands. If not managed well, you can face problems like stockouts and understocks. Stockouts alone can cause lost revenue, sales, customers, profits, and brand reputation. According to Harvard Business Review, a business can lose 50% of their intended purchase in case of stock outs. In 2023, most US and Canadian business owners lost almost $350 billion because they failed to manage their stock properly and faced stockouts.
That’s why you need safety stocks, which can be calculated using the Safety Stock Formula. In this blog, you will learn 8 formulas that will help you manage your stocks properly before they hit ” no more.”
What is Safety Stock?
Safety stock is an extra inventory that helps you prevent stock-outs.
Source: Zoho
But the question is how you can predict when to order inventory. How many stocks are “last drops” before which you have to reorder? Should you reorder when you have 10 products in stock or 20 or 30?
The answer is that it’s more math than just predictions and guesswork. Every product has a different value for safety stock based on various factors (like lead time, lead time demand, standard deviation demand, etc).
Lead time demand is when your order arrives after punching it to your supplier.
Why does safety stock matter?
A study reported in Harvard Business Review found that stockouts can cause “walkouts,” meaning that about 21-43% of people will go straight to your competitor in search of a particular product instead of staying. Therefore, you must have a safety stock to prevent situations like this.
One of the most common causes of stockouts is supplier delay or demand spikes due to poor demand forecasting. Both these issues can be prevented using a safety stock formula. Let’s see how we can calculate safety stocks using eight different formulas.
Source: Erplain
What is the safety stock formula?
A formula you apply to get the safety stock value, a value that you set for a product before it is stocked out. It’s like a threshold to manage supply chains smoothly.
8 Safety Stock Formulas
| Formula | Equation | When to Use | Example/Notes |
| 1. Average-Max Method | (Max Daily Sales × Max Lead Time) – (Avg Daily Sales × Avg Lead Time) | Start-ups with limited historical data | Max sales = 120/day, Avg sales = 80/day → Safety stock = 640 units |
| 2. Z-Score (Demand Variability) | Z × σD × √Lead Time | Demand fluctuates significantly | σD = 15 units/day, Z=1.65 (95% service level) → Buffer for demand swings |
| 3. Z-Score (Lead Time Variability) | Z × σLT × Avg Demand | Lead times are unpredictable (e.g., global shipping) | σLT = 2 days, Avg demand = 50/day → Buffer for supplier delays |
| 4. Combined Variability | Z × √[(σD² × LT) + (σLT² × Avg Demand²)] | Both demand and lead times vary (e.g., holidays) | Accounts for “double uncertainty” (e.g., Black Friday sales + shipping delays) |
| 5. 50% Lead Time Rule | 0.5 × (Avg Daily Sales × Avg Lead Time) | Stable industries (e.g., office supplies) | Avg sales = 100/day, lead time = 7 days → Safety stock = 350 units |
| 6. EOQ Integration | √[(2 × Demand × Order Cost) / Holding Cost] | Optimizing order quantities + safety stock | Balances ordering costs (e.g.,
50/order) and holding costs (e.g., 50/order)and holding costs(e.g.,2/unit/month) |
| 7. Demand-Only Buffer | Max Daily Demand – Avg Daily Demand | No lead time data (suppliers are reliable) | Max demand = 200/day, Avg demand = 150/day → Safety stock = 50 units |
| 8. Manufacturing Adjustments | (Z × σD × √Lead Time) + (Delay Days × Avg Daily Demand) | Raw material delays (e.g., semiconductor shortages) | Adds buffer for production holdups (e.g., 3-day delay × 50 units/day = +150 units) |
Key Variables
- Z: Service level factor (e.g., 1.65 for 95% stockout avoidance)
- σD: Standard deviation of daily demand
- σLT: Standard deviation of lead time (days)
- LT: Average lead time
The most commonly used safety stock formula
Safety Stock = Z × σLT × √LT
Where:
- Z = Z-score, based on your desired service level (e.g., 1.64 for 95% service level)
- σLT = Standard deviation of demand during lead time
- LT = Average lead time (in days or weeks)
Service level: The threshold you set for a particular product before you reorder it to prevent stockout.
Standard deviation of demand: The demand variability between lead time (when the order is placed and when we receive it from the supplier). It measures the deviation between the demand between lead time and the average demand.
Lead time demand: Demand of a Particular product during the lead time.
This formula helps estimate how much extra inventory you need to cover demand and lead time variability.
What is Z in the Safety Stock Formula?
Z is a statistical value that shows the service level you want to maintain. It reflects the probability of not running out of stock.
Here’s a quick reference:
| Service Level | Z-Score |
| 90% | 1.28 |
| 95% | 1.64 |
| 97.5% | 1.96 |
| 99% | 2.33 |
If you want a 95% chance of not running out of stock, use 1.64 as your Z value.
Example: Safety Stock Formula for Manufacturing
Manufacturing businesses mostly face unpredictable supplier schedules and demand. Therefore, managing the stocks can be very tricky. Let’s apply a general formula to find out the safety stock for a manufacturing business;
Let’s say:
- Average daily demand = 300 units
- Lead time = 5 days
- Standard deviation of demand during lead time = 50 units
- Desired service level = 95% (Z = 1.64)
Safety Stock = 1.64 × 50 × √5 ≈ 183 units
This means you should always keep 183 units of safety stock to account for demand fluctuations during the 5-day lead time.
Safety stock formula without lead time
Let’s take the above example. You are in the manufacturing business. You want to find your safety stocks, but your lead time is consistent or irrelevant. You might source locally or just in time. You do not want to do too much math to find a safety stock. You can use the simplest formula.
Safety Stock = (Max Daily Usage × Max Lead Time) – (Average Daily Usage × Average Lead Time)
This method is simpler and useful when lead time variation is minimal. It focuses more on usage rates than variability.
Using Z-Score in Safety Stock Formula
Z score shapes your inventory strategy. Based on the value of Z, you can find out the deviation between the lead time demand vs average demand and can predict safety stock to avoid risks.
A higher Z means more safety stock and fewer stockouts but also higher carrying costs.
Let’s say you want a 99% service level:
- Z = 2.33
- Standard deviation of demand = 40
- Lead time = 4 days
Safety Stock = 2.33 × 40 × √4 = 2.33 × 40 × 2 = 186.4 units
Even a small change in Z can significantly impact your safety stock, so choose wisely based on how critical the item is.
Step-by-Step Guide to Calculating Safety Stock
Step 1: Gather your data
First, gather all the data that you need to include in your safety stock calculation. You can choose how much data (sales history) you need based on duration, such as week-long data, six-month data, or 12-month data.
Then, find out the lead time, lead time demand, average lead time, and standard deviation demand. To get the most accurate lead times, also include supplier delays.
Step 2: Choose your Z-Score
| Service Level | Z-Score |
| 85% | 1.04 |
| 90% | 1.28 |
| 95% | 1.65 |
| 99% | 2.33 |
A 95% service level means you’re okay with a 5% stockout risk.
Step 3: Match the formula to your business
You cannot just randomly use a formula to calculate your safety stock. First, understand which frmyla will best suit your business to find out the most accurate value.
If you are in the Manufacturing business, use Formula 1 or 8.
If you have a Stable demand, use Formula 5 or 1.
If you have unpredictable or wild demand cycles, use Formula 4.
Example:
Imagine you’re a wholesaler of LED light fixtures:
- Avg daily demand: 200 units
- Standard dev of daily demand: 30 units
- Lead time: 7 days
- Service level: 95% (Z = 1.64)
Step 1: Calculate standard deviation during lead time
- σLT = 30
Step 2: Apply the formula
- Safety Stock = 1.64 × 30 × √7 ≈ 1.64 × 30 × 2.65 ≈ 130.38 units**
Keep ~130 units as a buffer to avoid stockouts.
3 Common mistakes to avoid
1- Guesswork
Your supply and demand is based on guesswork. To avoid being stuck with too much or too little inventory, start with a simple spreadsheet or Excel sheet. Track your lead time variability for 03 months and calculate your safety stocks.
2- You ignore seasonality
Your whole supply chain is again based on trends. It’s a deadly road, where a single shift can wrap your money up in your warehouse.
To avoid this, recalculate safety stock quarterly.
Q4 holiday demand ≠ Q1 slump.
3- You play safe
To avoid the fear of being stocked out during demand peaks, or to get excited after getting back-to-back orders at a specific time of the year, you overstock your inventory without calculating the previous records.
To fix this, use Z-scores to balance holding costs (1 unit/month) vs. stockout risks (100/lost sale).
Tools to Automate the Process
| Tool | Features |
| SeeBiz Inventory | For SMEs and wholesalers to manage their inventory in one place. (Free plan available) |
| Katana | $99/month, auto-adjusts safety stock for SMEs. |
| SAP IBP | For enterprises with 10,000+ SKUs. |
Conclusion
Now that you understand the safety stock formula and how it can impact your whole supply chain, you must start building your spreadsheet to maintain your safety stocks more cautiously.
If you are looking for a platform to help you manage your stock and determine your safety stock level, Seebiz Inventory is the best option. In Seebiz inventory software, you can set reorder thresholds for each product individually, and you don’t need to do math for every product.
FAQs
Q: What is safety stock?
Safety stock is an extra inventory that helps you prevent stock-outs.
Q: What is the safety stock formula?
A formula you apply to get the safety stock value, a value that you set for a product before it is stocked out. It’s like a threshold to manage supply chains smoothly.
Safety Stock = Z × σLT × √LT
Q: How do you calculate safety stock?
Step 1: Gather your data
Step 2: Choose your Z-Score
Step 3: Apply the formula: Z × σLT × √LT
Q: Can I calculate safety stock without lead time data?
Use Formula 7 (demand-only buffer) until you collect lead time stats.
Q: Why does Z-score matter?
It’s your “risk tolerance” number.
Higher Z = more stockouts avoided but higher holding costs.
Q: What if I have multiple warehouses?
Calculate safety stock per location (demand patterns vary by region). You can also use an inventory management tool like Seebiz Inventory to keep a check and balance on a single platform.
