Safety stock is a buffer stock prepared to prevent out-of-stock due to uncertain factors (for example, a surge in orders, unexpected interruptions in delivery, delayed delivery due to delayed factory resumption caused by the epidemic, etc.). Safety stock means that sellers have to invest money to resist risks. Just like some people will buy high-value insurance, it seems that there is a lot of investment in the early stage, but in case of an emergency, it can turn the tide.
There are two ways to calculate safety stock. The first is based on “days”; the second is based on “percentage of total inventory”. Personally, I prefer the second method. When we are making a stocking plan for product A, we can calculate the safety stock of product A according to 25% of the total inventory. The reason for setting the ratio of 25% is mainly due to the following two factors.
Factor 1: The delivery cycle of product A is very long. Since product A is shipped by sea, the replenishment cycle is long, so the amount of its safety stock has to be increased.
Factor 2: Product A has a short sales period. Product A is a new product with a short sales history, so it is difficult for us to make a relatively accurate estimate of future sales.
Therefore, for the sake of insurance, the safety stock of product A should be set at 25% of the total inventory. Do not copy this 25% ratio completely, because this ratio will involve issues such as the seller’s cash flow, so it is recommended that sellers adjust it according to their actual situation. For example, during the epidemic, if the seller can send out the replenishment this time and it is expected that the epidemic may be difficult to be quickly controlled in the future and the factory will be difficult to resume production quickly, then this ratio can be increased.
Safety stock is a very important concept. If the seller who replenished the last time before 2020 prepared sufficient safety stock, it can be maintained until March 2021 in the best case. Even if it is out of stock, the out-of-stock time will be shorter than that of competitors. The more safety stock, the safer it is. If the seller has already experienced out-of-stock during this epidemic, then do not stock up too much because of this. This will not only lead to compressed cash flow, but also cause the FBA warehouse to bear increasing pressure. In the third quarter of 2019, Amazon raised the inventory index score from 350 to 400. Once the seller’s inventory is unsalable and the inventory index score is less than 400, not only will high Amazon storage fees be incurred, but the next quarter will also be subject to storage restrictions, affecting the normal operation of the store.