6 Safety Stock Formulas You Can

Consider in Your Next Calculation Cycle

1. Average SS
Safety stock = (max daily sale per unit * max LT in days) – (average daily sales per unit *
average LT)

Although the above safety Stock formula is simple and gives an average amount of Safety
Stock the company need to hold per unit of stock however does not take into account
seasonal fluctuations (trade gecko, 2010)

2. Heizer and Render (2013)

?????? ????? = ?????

Z= number of standard normal deviations (Z-score)

???? = standard deviation of demand during the lead time.

Although this approach is takes into consideration standard deviation, it does not take
account of time by including it as variable in the equation (Emmanuel-Ebikake, 2015).

3. Greasley (2013)
?????? ????? = ? ∗( √??) ∗ ??

Z= number of standard deviations from the mean (Z-score)

LT = lead time

?? = standard deviation of demand rate.

On the other hand, this approach takes account of lead time as a variable within the
equation. This is one of favorite Safety Stock formula.

4. King method
?????? ????? = ? ∗( √ ?? / ?1) ∗ ??

Z= Z-score (a statistical figure based on the cycle service level)

PC = performance cycle or total lead time (including transport time)

T1 = time increment used for calculating standard deviation of demand

?? = standard deviation of demand

King (2011) safety stock formula, considers variations in demand, lead time, cycle time and
fill rate. The purpose of the formula was to overcome the inaccuracies in data on demand.
(Emmanuel-Ebikake, 2015)

5. King (2011)
Safety stock = Z *√ ((PC/ T1 * σD 2) + (σLT × Davg)) 2

Z= Z-score (a statistical figure based on the cycle service level)

PC = performance cycle or total lead time (including transport time)

T1 = time increment used for calculating standard deviation of demand

?? = standard deviation of demand

???? = standard deviation of demand during the lead time

Davg= average demand

This safety stock formula is used when demand and lead time variability are independent
and are therefore influenced by different factors whilst still having normally distribution.

But when demand and lead time are not independent of each other, this equation changes
to:

Safety stock = (Z *√( PC/ T1 * σD) + ( Z * σLT * Davg)

6 McKinsey & Company Method.

In selecting to consider any safety stock formula, it is important to consider the joint impact
of demand and replenishment cycle variability. This can be accomplished by gathering
valid samples of data on recent sales volume replenishment cycles. Once the data are
gathered, it is possible to determine safety stock requirement using this safety stock
formula:

σC = √R (σS2 ) + S2 (σR2 )

σC = Units of safety stock need to satisfy 68 percent of all probabilities (one standard
deviation)
R = Average replenishment cycle

σR = Standard deviation of the replenishment cycle

S = Average daily sales

σS = Stanard deviation of daily sales

How to do Economic Order Quantity (EOQ) calculation with examples

The economic order quantity is a method used to calculate when stocks need replenishing,
the purpose of this method is to balance the benefits and disadvantages of holding stock,
namely minimising the cost of holding stock also mitigating the risks associated with this
and reducing the ordering costs, this would then lead to the optimum quantity of goods
being kept.

There is one commonly used formula used to:

EOQ= √ (2*CO *D)/CH

Co= Total cost of placing an order

D = Demand

CH= Total cost of holding a unit of stock

In this formula holding costs include: Order costs are calculated using

Working capital costs Cost of placing the order

Storage costs Price discount costs

Obsolescence costs

Below is a worked example (Slack, 2016)

A construction company gets its cement from a single supplier, the demand throughout the
year is constant and last year the company sold 4000 tons of cement. After some
calculation the cost of placing an order is £50 each time with the annual costs of holding the
cement being at 40 % of the purchasing cost. The company purchases the cement at £120
per tonn. How much should the company order at a time?

EOQ= √ (2*CO *D)/CH

EOQ= √ (2*50*4,000)/ (0.4*120)

EOQ= √ (400,000)/ (48)

EOQ= 28.87 tons (answer in 2d. p)

Summary:

Like many other statistical theories and mathematical equation, no safety stock formula
can be claimed to be best. Similarly no formula can claim to be fit in all scenarios. Use your
knowledge and experience to find which formula best suits your business.