What is safety stock and why is it important? Safety stock is a buffer of extra stock designed to compensate for forecast error. It is one component in determining the MIN used as a trigger for ordering. When an item reaches a MIN it is supposed to have enough to last (usually one lead time of usage) until the new order arrives. If all forecasts were perfect, there would be no need for safety stock. They are not. Hence, the safety stock becomes a buffer for imperfect forecasts. Each statistical forecast has an error. Some errors are large (unpredictable items) while others are small (stable items with high volumes). This error dictates how much buffer stock is expected to be safe with the coming prediction. This is known as the safety stock for an item.
Bothe forecast error and criticality (i.e., service level) can affect safety stock. More critical items will have higher safety stock levels. Items with higher forecast errors will also have higher safety stock levels. A combination of both factors will impact this value, and each item can be different in its forecast pattern. As service level approaches 99% the cost of extra stock tends to become extremely high. Always be careful not to abuse this parameter.