Safety stock

Safety stock is extra inventory held beyond what's expected to be needed, to absorb uncertainty in either demand or how long it takes a supplier to deliver, so a business doesn't run out when reality diverges from the plan.

A common formula is safety stock = Z × σ(demand) × √(lead time), where Z is a service-level factor — a higher Z targets a higher probability of not stocking out — and σ(demand) is the standard deviation of demand over the period. More complete versions also factor in variability in lead time itself, not just demand, since an unpredictable supplier requires more buffer even at constant demand.

Too little safety stock causes stockouts and missed orders; too much ties up working capital and raises the risk of obsolete inventory. Poor demand forecasting increases the safety stock needed to hit any given service level, and safety stock decisions made independently at each stage of a supply chain — each link padding its own buffer — are a major contributor to the bullwhip effect. Targets set once and never revisited as demand patterns or supplier reliability change are a common and costly mistake.