Safety Stock Strategy: Weighing the Benefits and Drawbacks for E-commerce Brands
Introduction
Imagine running an e-commerce business where you never run out of stock, and your customers always receive their orders on time. Sounds too good to be true? Well, it can be a reality with the right inventory management approach - for instance, by working with a technologically capable 3PL or by putting a safety stock strategy in place.
In this article, we'll assume you aren’t working with a 3PL who maintains a high level of inventory accuracy and we’ll explore the pros and cons of using safety stock in e-commerce inventory management, helping you strike the perfect balance between risk and reward. Let's dive in!
What is Safety Stock?
Safety stock, also known as buffer stock, is the extra inventory kept on hand to protect against stockouts or unexpected spikes in demand. It acts as a safety net to ensure that your e-commerce business continues to operate smoothly even when dealing with an unreliable warehouse inventory accuracy, or when faced with unforeseen challenges like supply chain disruptions or sudden increases in customer orders.
| Quick Summary: Safety Stock Strategy | |
|---|---|
| Pros | Cons |
| 1. Prevent Stockouts: Safety stock minimizes the risk of stockouts, ensuring products are available to meet customer demand. | 1. Increased Carrying Costs: Holding safety stock leads to higher carrying costs, including storage, insurance, and spoilage or obsolescence risk. |
| 2. Maintain Sales Continuity: Safety stock helps maintain sales continuity, even when there are disruptions in the supply chain. | 2. Tying Up Capital: Investing in safety stock ties up capital that could be used elsewhere in your business. |
| 3. Improve Customer Satisfaction: Safety stock ensures products are always available for purchase, leading to higher customer satisfaction and positive word-of-mouth. | 3. Warehouse Space Constraints: Storing safety stock requires warehouse space, which can be expensive and may not be a viable option for all businesses. |
The Pros of Using Safety Stock Strategy
Prevent Stockouts
Stockouts can significantly hurt your e-commerce business. Not only do they lead to lost sales and dissatisfied customers, but they can also damage your brand's reputation. By implementing a safety stock strategy, you can minimize the risk of stockouts, ensuring that you always have products available to meet customer demand.
Maintain Sales Continuity
Safety stock helps you maintain sales continuity, even when there are disruptions in your supply chain.
For example, if your supplier faces a delay in delivering a product, having safety stock on hand means you can continue to fulfill customer orders without interruption. This helps maintain customer satisfaction and keeps your sales numbers steady.
Improve Customer Satisfaction
Customers expect timely delivery of their orders, and running out of stock can lead to disappointed customers and negative reviews.
Safety stock helps you meet customer expectations by ensuring that products are always available for purchase. This, in turn, leads to higher customer satisfaction and positive word-of-mouth.
The Cons of Using Safety Stock Strategy
Increased Carrying Costs
Holding safety stock means increased carrying costs for your e-commerce business. These costs include storage, insurance, and the risk of spoilage or obsolescence. The more safety stock you keep, the higher your carrying costs will be. It's essential to find the right balance between having enough safety stock to prevent stockouts and not holding too much inventory that increases your carrying costs.
Tying Up Capital
When you invest in safety stock, you're tying up capital in inventory that could be used elsewhere in your business, such as marketing, product development, or hiring staff. It's crucial to consider the opportunity cost of holding safety stock and weigh it against the benefits of preventing stockouts.
Modern software & processes specifically aim against using safety stock, because with the right systems and SOP’s in place, inventory data can be exchanged frequently & accurately.
To help you manage costs & even save money, ensure your logistics partner prioritizes maintaining accurate inventory levels at all times.
Warehouse Space Constraints
Storing safety stock requires warehouse space, which can be a risk to overall brand growth, as well as present a physical limitation for many e-commerce businesses.
Holding too much safety stock might mean you need to invest in additional warehouse space, which can be expensive and may not be a viable option for all businesses.
Finding the Right Balance
To find the right balance between the pros and cons of safety stock, it's essential to analyze your business's specific needs and requirements. And, for medium & large sized brands, choosing a 3PL partner who maintains precise & accurate inventory levels, and can report those inventory levels automatically via integration, may not need a safety stock strategy at all.
Here are some factors to consider when determining the appropriate level of safety stock for your e-commerce business:
Demand Variability
Consider the variability of demand for your products. If you sell products with highly variable demand, you may need to hold more safety stock to account for fluctuations.
On the other hand, if demand is relatively stable, you can likely keep lower levels of safety stock.
Lead Time Variability
Lead time is the time it takes for your supplier to deliver products to your warehouse.
If your supplier has a history of inconsistent lead times, you may need to keep more safety stock on hand to compensate for potential delays.
If you’re experiencing long lead times, ask if your 3PL is capable of helping provide domestic or international freight resources to help speed up your factory-to-warehouse transit time.
Order Cycle Time
Order cycle time is the time it takes to place an order with your supplier and receive the products. If your order cycle time is long, you may need to hold more safety stock to ensure you have enough inventory to cover the period between placing an order and receiving new stock.
“Ship Complete” Service Level Goal
Your desired “Ship Complete” service level is the percentage of customer orders you want to fulfill without experiencing any stockouts.
A higher % of Ship Complete service level means you'll need to have precise inventory reported from the warehouse to your system OR you’ll need to hold more safety stock to meet customer demand consistently. For example, if you want 99% of your orders to Ship Complete, you should make sure your warehouse reports accurate inventory on a frequent basis OR you could plan on having a greater inventory stock buffer.
Even then, it's essential to weigh the cost of holding additional safety stock against the potential revenue gained from a higher service level.
Product Life Cycle
Consider the life cycle of your products when determining safety stock levels.
If you sell products with a short life cycle, such as perishable goods or items that become obsolete quickly, holding too much safety stock can result in spoilage or excess inventory that's difficult to sell.
Wrapping Up
Implementing a safety stock strategy in your e-commerce inventory management can offer several benefits, including preventing stockouts, maintaining sales continuity, and improving customer satisfaction. However, it's crucial to weigh these advantages against the potential drawbacks, such as increased carrying costs, tying up capital, and warehouse space constraints.
Finding the right balance requires analyzing your business's unique needs and considering factors like demand variability, lead time variability, order cycle time, desired service level, and product life cycle. By striking the perfect balance between risk and reward, you can ensure your e-commerce business operates smoothly, keeping customers happy and your bottom line healthy.
Need Help or Want More Info?
Carrying too much or too little inventory presents unique risks, as well as opportunities for any brand. If you’re struggling with inventory management because you’re current partner isn’t able to report accurate inventory, or you’re unsatisfied with your current logistics posture, please consider reaching out — someone from our logistics team typically replies within 1 hour.
What is Safety Stock?
Safety stock, also known as buffer stock, is the extra inventory kept on hand to protect against stockouts or unexpected spikes in demand.