Question 1

How do you calculate safety stock?

Accepted Answer

Safety stock = Z × σ_dLT, where Z is the service level z-score (1.65 for 95%) and σ_dLT is the combined standard deviation of demand during lead time. The combined formula accounts for both demand variability and lead time variability: σ_dLT = √(LT × σ_d² + d̄² × σ_LT²). This is the most accurate method because it captures both sources of uncertainty.

Question 2

What is a good service level for safety stock?

Accepted Answer

95% is the standard for most products — you'll have stock 95% of the time during lead time. Use 99% for best-sellers, high-margin items, or products where stockouts lose customers permanently. Use 85-90% for slow-moving, low-margin, or seasonal items. Each service level increase requires exponentially more stock: going from 95% to 99% nearly doubles safety stock, while going from 90% to 95% adds about 30%.

Question 3

What is the difference between demand variability and lead time variability?

Accepted Answer

Demand variability is how much daily sales fluctuate (some days you sell 8 units, some days 22). Lead time variability is how much supplier delivery times fluctuate (sometimes 12 days, sometimes 18). Both create stockout risk: demand spikes drain inventory faster, late deliveries mean replenishment arrives late. This calculator shows which factor drives more of your safety stock, so you know where to focus improvement efforts.

Question 4

How do I estimate standard deviation of demand?

Accepted Answer

Three methods: 1) If you have daily sales data, calculate the actual standard deviation in a spreadsheet (STDEV function). 2) Quick estimate: (peak daily sales - average daily sales) / 2. 3) Use coefficient of variation (CoV) benchmarks: stable products have 15-25% CoV, moderate products 25-50%, volatile products 50%+. Multiply average daily sales by CoV to get standard deviation.

Question 5

Is safety stock worth the holding cost?

Accepted Answer

Almost always yes. Safety stock holding cost is typically 20-30% of tied-up inventory value per year. A stockout costs lost revenue, lost customers (30-40% may not return), lower search rankings, and competitor gains. Compare: 50 units of safety stock at $12/unit = $600 tied up, $150/year holding cost. One week-long stockout at 15 units/day × $38 = $3,990 in lost revenue. The holding cost is a small insurance premium.

Service Level	Z-Score	Safety Stock	Days Cover	Value Tied Up	Holding/yr
85%	1.04	51 units	3.4	$612	$153
90%	1.28	63 units	4.2	$756	$189
95%Selected	1.65	81 units	5.4	$972	$243
97.5%	1.96	96 units	6.4	$1,152	$288
99%	2.33	114 units	7.6	$1,368	$342
99.5%	2.58	126 units	8.4	$1,512	$378

Safety Stock Calculator

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