Safety stock vs. buffer stock: what’s the difference?By Jon Taylor on December 13, 2023 - 5 Minute Read
For many businesses, the last couple of years have felt like one big (volatile) supply chain earthquake.
But there is also a harsh reality for businesses in sectors like retail: customers don’t usually care what’s going on behind the scenes. And if you don’t have what they need, they will go elsewhere. Not only does this impact your sales, but running out of stock can have a long-term negative effect on brand loyalty. In short, disappoint them once at your peril — because they may not come back ever again.
The good news is that there are guardrails to protect you against stockouts. Thanks to things like safety stock and buffer stock, you can optimize your inventories to account for the unexpected and better deal with uncertainty.
This guide will teach you how to use both. Let’s dive in 👇
What is safety stock?
Safety stock is reserve product inventory that ensures a business can maintain stock levels if it is hit by delays or supply chain issues.
It’s a bit like a fire extinguisher — it’s there in case of emergencies, covering you for problems like demand surges, shipment delays and even natural disasters that interrupt your supply chain.
Safety stock helps your business avoid stockouts and have enough supply for unanticipated shortages. And if you sell a physical product, you know stockouts can be a huge problem. Studies show stockouts cost US and Canadian retailers $350 billion in lost revenue in 2022 alone.
Another reason safety stock is essential is it stops shoppers from going to a competitor. If you think a customer will wait around for an item to come back into stock, think again. A Harvard study found that fewer than half of customers, on average, will substitute out-of-stock items for another (similar) product in a store. In fact, nearly a third will buy the item elsewhere.
So, safety stock is clearly incredibly useful to have in your back pocket. But how much safety stock should you have on hand?
It depends on your product, but — traditionally — once a safety stock level is set, it doesn’t normally fluctuate every day. For example, a clothing retailer could keep 100 units of fixed safety stock of a specific shirt above normal inventory limits at all times.
However, this simple formula doesn’t weigh up against variables. If a product is seasonal or has a promotional campaign coming up, those factors need to be taken into account.
That’s where buffer stock can come into play 👇
What is buffer stock?
Buffer stock is inventory kept on hand to account for fluctuations in demand. Like safety stock, the main purpose of buffer stock is to avoid stockouts. But buffer stock will fill in any gaps by sales spikes, like holiday sales or seasonal fluctuations.
Businesses usually use a specific time period to calculate how much buffer stock to keep on hand.
Let’s say a tech retailer stocks a specific camera, but a newer model is released each year. The retailer can increase buffer stock around BFCM/Christmas time when people are likely to buy the camera. Then, they can slowly decrease the buffer stock level in the new year when people may be on the fence and decide to wait for the newer model to be released.
Economically, it’s best to make a precise calculation about how much buffer stock you actually need. To figure out an ideal buffer inventory, multiply the maximum daily sale of an SKU and maximum lead time, and then subtract average daily sales and lead times.
Buffer stock = (max daily sales)(max lead time) – (average daily sales)(average lead time)
The problem with buffer stock is it is only one safeguard against stockouts. A lot of companies fall into a trap and think if they have buffer stock, they don’t need safety stock.
However, there are some key differences between the two — and both have their own unique purpose within your approach to inventory management 👇
The main differences between safety stock and buffer stock
Think safety stock and buffer stock are the same thing? Think again.
Although both are used to avoid stockouts, each strategy targets different reasons behind why that stockout may happen in the first place 👇
- Safety stock is the first wall of defense in a supply chain. It’s the first stock to be triggered by an “emergency” like transportation delays, supply chain shortages or production problems
- On the flipside, buffer stock avoids stockouts for demand fluctuations like increased holiday sales or promotions
- Safety stock is usually a set level based on each SKU, whereas buffer stock regularly fluctuates depending on seasonality and marketing campaigns
Another way to look at the differences is like this: safety stock is the equivalent of keeping candles in the cupboard in case there is a power cut. Without them, you can’t see or do anything because you don’t have any lights. This is the exact scenario you face if your supply chain is hit with delays or there is a logistics emergency that prevents order shipments. You’ll be left in the dark.
On the other hand, buffer stock is like having extra food in the house at Christmas. Without it, guests will go hungry and leave — just like your customers would leave your store. And they probably won’t come back next year!
Each strategy is used differently, but it’s much safer to use both to cover all bases and avoid stockouts at any time of the year.
Buffer stock is like having extra food in the house at Christmas. Without it, guests will go hungry and leave — just like your customers would leave your store. And they probably won't come back next year!
How to use inventory management to optimize safety stock and buffer stock
Use data to set (and optimize) stock levels
The main ingredient to an optimized stock level is data. Let’s start with a closer look at safety stock.
At Peak, we believe the best way to calculate safety stock is with a SKU-specific approach made up of three key components:
- Demand safety stock accounts for uncertainty around specific SKUs
- Supply safety stock accounts for supply chain issues
- Production safety stock accounts for production problems
If you cover all three bases, you are left with an accurate idea of how much total SKU-specific safety stock must be in your inventory.
Existing inventory data is especially useful to set accurate buffer stock levels. By looking at historical demand patterns, you can set buffer stock levels to optimize turnover and warehouse storage.
Let’s say an online footwear store stocks a couple of lines of Yeezy sneakers. Each Christmas, the store does a promotional push, and three lines of Yeezys go on sale. The store can look at historical data levels to see:
- Average daily sell rate of each SKU
- Average lead time to fulfill each SKU
- Average demand time for each SKU
If customers historically start shopping for Yeezys around mid-November, the retailer knows its increased buffer stock levels must be in place at that time. It can then calculate when the buffer stock level can reduce after Christmas by looking at when the sales numbers usually start to dip.
This way, the store can capitalize on the extra sales at Christmas with the buffer stock without having a ton of extra Yeezys sitting in the warehouse in the New Year 👟
Use the right toolkit to optimize inventory
We aren’t going to sugarcoat it — managing safety and buffer stock levels optimally is basically impossible without some sort of sophisticated inventory management software.
It’s simply not humanly possible to check, recalculate and optimize every individual SKU in a company’s entire inventory — at least if you want to do it accurately. Here’s what that process looks like using Peak:
Every stock point is optimized using artificial intelligence (AI)
AI is introduced during the inventory phase of your supply chain. Our algorithm tracks a huge amount of data and triggers alerts around what, when and how much product needs to be ordered. Custom safety and buffer stock levels can be set based on historical data and demand forecasts.
Replenish stock, don’t over stock
Storing excess stock can be costly due to warehouse fees and capital that’s wrapped up in inventory sitting around that’s not being sold. Our AI replenishment models help calculate stock levels based on demand to avoid overstocking and help to keep your inventory lean and cash-efficient.
Triggered reorder points
Our Reorder application calculates optimal inventory levels at every distribution center or store within your company. Thanks to real-time data, Peak calculates accurate reorder points and lead times for each individual SKU and triggers an alert when safety/buffer stock levels are in danger of not meeting service levels.
With the right inventory management toolkit, you can not only keep inventory costs low, but alos ensure you always have enough products on the shelves.
For your customers, that’s the difference between putting money in your competitor’s pocket or yours. Which would you rather? 😉
Ready to avoid stockouts forever?
Peak's Inventory Intelligence applications help businesses to maximize margins and minimize wastage and unnecessary costs while keeping every SKU in stock.