Safety Stock in E-commerce: What It Is and What to Do?
A safety stock is essential for any store operating in retail. It ensures that even if sales are higher in a given month, no product will be out of stock.
“It’s available, but it’s sold out” is a common phrase in many stores. It’s also not unusual to find retailers who take pride in completely selling out their inventory within a month.
The issue is that a sold-out inventory doesn’t generate new customers. And new customers become frustrated with stock shortages, to the point where they may decide never to shop at that store again.
A physical store needs a safety stock. An e-commerce store does too. But when a physical store expands to e-commerce, this necessity becomes even more urgent.
Today, this article is for e-commerce businesses that operate solely online and for those that follow a hybrid model. How can you keep your inventory consistently stocked?
Let’s start with the basics:
What Is a Safety Stock?
A safety stock is a predetermined quantity of products that you always keep in your inventory for each of your items, avoiding selling them and replenishing in a different way.
Instead of relying on the safety stock for replenishment, the products needed for monthly sales are purchased separately, keeping the safety stock untouched.
For example: You buy 50 units of Product X every month but maintain a safety stock of 5 units.
In January, you sell all your Product X units. When restocking, you don’t buy 45 units of Product X but rather 50.
This is a basic principle: safety stock is as old as commerce itself.
A safety stock should never be used. However, to fully understand inventory management, we need to discuss minimum stock, average stock, maximum stock, and reorder points.
These five concepts are fundamental in inventory management. Many stores understand the first part—safety stock—but overlook the rest.
Now, you will learn everything related to inventory logistics. After that, we’ll discuss practical applications.
Let’s dive in:
Organizational Concepts and General Inventory Logistics
Inventory management is a crucial aspect of any retail business.
Many people believe that business success is solely based on sales—companies that sell the most are always ahead.
However, that’s not entirely true. The operational and administrative side determines whether a company will grow and sustain itself in the market.
After all, a business with an organized administration but low sales can still survive—it knows how much money it has, how many products it needs to sell, and how many items can be sold.
A business with high sales but disorganized administration faces difficulties in scaling, even with strong sales figures.
And one of the most critical aspects of administration in any retail company is inventory management.
Here, we’ll discuss four key inventory management concepts:
- Minimum Stock
- Maximum Stock
- Average Stock
- Reorder Point
Let’s break them down:
Minimum Stock: What It Is and How to Calculate It
Minimum stock is the minimum quantity of a product a company must keep in its warehouse to prevent stockouts.
It serves as a safety reserve to ensure that the company does not run out of merchandise before a new order arrives.
This concept ensures that the sales flow is not interrupted due to stock shortages.
A poorly calculated minimum stock can lead to stockouts, negatively impacting sales and the customer experience.
Defining the minimum stock depends on the average daily consumption and the supplier’s lead time.
Companies that work with suppliers that have long delivery times need to maintain a higher minimum stock to avoid disruptions.
Formula:
📌 Minimum Stock = Average Daily Consumption × Lead Time
Maximum Stock: Control and Planning
Maximum stock represents the highest quantity of an item a company can store without compromising space, cash flow, or operational efficiency.
Keeping excessive stock can create financial problems—capital tied up in unsold inventory could be better used elsewhere.
Additionally, products may expire or become obsolete, especially perishable or seasonal items.
The calculation of maximum stock considers the minimum stock and purchase batch size, ensuring the company maintains the optimal quantity to operate without excess or shortages.
Formula:
📌 Maximum Stock = Minimum Stock + (Purchase Batch × Purchase Interval)
Average Stock: Determining the Average Inventory Level
Average stock is an indicator that helps a company understand the typical quantity of products stored over time.
It assists in purchase management and demand forecasting, ensuring a balance between restocking and consumption.
A well-calculated average stock prevents both shortages and excess inventory. If the average stock is too high, the company may be over-investing in idle products. If it is too low, meeting demand may become difficult.
Formula:
📌 Average Stock = (Initial Stock + Final Stock) ÷ 2
Reorder Point: The Right Time to Restock
The reorder point is one of the most critical concepts in inventory management. It determines the exact moment to place a new replenishment order, ensuring the company never runs out of stock.
This calculation considers average daily consumption, supplier lead time, and a safety stock buffer to account for unforeseen delays.
If the reorder point is calculated correctly, a company reduces the risk of stockouts without needing excessive inventory.
Formula:
📌 Reorder Point = (Average Daily Consumption × Lead Time) + Safety Stock
How to Calculate Average Daily Consumption and Lead Time?
The average daily consumption refers to the average number of products sold or used per day. It is calculated by dividing total consumption over a given period by the number of days in that period.
📌 Formula:
Average Daily Consumption = Total Consumption in the Period ÷ Number of Days
Lead time is the period required for an order to be delivered by the supplier, counted from the moment the request is placed until the product arrives.
To determine it accurately, companies should analyze their purchase history and the average supplier delivery times.
Inventory Challenges for E-commerce + Physical Stores
Everything discussed so far applies to any retail business.
These calculations are useful for e-commerce businesses that operate exclusively online and for those that follow a hybrid model.
However, it’s important to recognize that e-commerce businesses operating alongside a physical store—selling through both channels simultaneously—face additional challenges in maintaining minimum stock levels.
While the formulas work universally, hybrid businesses encounter extra complexities that go beyond just calculations.
This section addresses the strategic aspects of minimum stock management in hybrid e-commerce operations—those selling both online and in physical stores.
Topics covered:
- How to avoid stockouts in both inventories
- Is it worth having separate inventories?
- How to integrate both inventories using ERPs
- How to calculate CMD (Average Daily Consumption) in e-commerce and integrate it with physical store inventory
Let’s dive in:
How to Avoid Stockouts in Both Inventories
For a hybrid e-commerce model that operates both online and in physical stores, preventing stockouts is one of the biggest challenges.
Stock shortages in either channel can lead to lost sales, dissatisfied customers, and even damage to the brand’s reputation.
The first step to avoiding stockouts is having precise control over demand in each channel. This can be achieved by analyzing sales history, seasonality, and consumption trends. This way, the company can anticipate periods of higher demand and prepare to maintain an adequate stock level.
Another crucial factor is efficient communication between the teams responsible for inventory management.
If the physical store and the e-commerce share the same stock, it is essential to have a real-time updated system to ensure that sales from one channel do not cause product shortages in the other.
Don’t worry—we’ll discuss this in more detail in the next section.
Additionally, maintaining a safety stock can help prevent issues with supplier delays or unexpected demand. Properly defining this reserve stock allows the company to continue operating even in unforeseen circumstances.
Finally, investing in technology, such as ERPs and integrated management systems, helps automate inventory control, reducing errors and optimizing product replenishment.
Is It Worth Having Separate Stocks?
A common question for companies operating in a hybrid model is whether it is worth maintaining separate stocks for e-commerce and the physical store.
The answer depends on several factors, such as sales volume, available space, and the business’s commercial strategy.
Keeping separate stocks can bring advantages, such as greater control over product availability in each channel. This prevents situations where a customer buys an item online only to discover that it has already been sold in the physical store.
Moreover, separate stocks allow the company to adopt different pricing strategies and promotions for each channel.
On the other hand, splitting stocks can increase operational costs. It requires stricter control to avoid excess inventory in one channel and shortages in the other. It can also make it harder to balance product replenishment, demanding more detailed logistical planning.
A viable alternative is working with a unified stock but using an efficient management system that can automatically allocate products for each sales channel. This way, businesses can maintain flexibility without losing stock control.
The final decision should consider the company’s operational capacity and customer behavior in each channel.
How to Integrate Both Stocks with ERPs
Integrating physical and digital stocks with an ERP (Enterprise Resource Planning) system is essential for efficient management and preventing failures that could compromise operations.
An ERP allows all product movements to be recorded in real time, ensuring that information is always up to date.
To integrate stocks, the first step is choosing an ERP that meets the business’s needs.
The system should be able to synchronize e-commerce and physical store data, automatically updating available quantities whenever a sale is made.
Another important feature is the ability to set up product reservation rules. For example, if a customer buys an item online, the system can immediately reserve that product in stock, preventing it from being sold in the physical store before the order is processed.
Additionally, an ERP can help automate replenishment by alerting businesses to low-stock products and suggesting restocking orders based on demand in each channel.
With a well-configured ERP, businesses can reduce errors, optimize logistics, and offer a smoother shopping experience for customers, regardless of their preferred sales channel.
How to Calculate Daily Average Consumption (DAC) in E-commerce and Integrate It with the Physical Store
Calculating Daily Average Consumption (DAC) is essential for determining minimum stock and reorder points for a product. In a hybrid e-commerce model, this calculation should consider both physical store and online sales.
The basic formula to calculate DAC is:
DAC = Total Consumption in the Period ÷ Number of Days
For a hybrid business, DAC can be calculated separately for each channel or combined into a unified DAC.
If the company chooses to keep separate stocks, it is recommended to calculate DAC individually for the physical store and e-commerce, ensuring that each has an adequate replenishment plan.
If stock is integrated, DAC should include sales from both channels. This can be done using an ERP that consolidates outbound inventory data, enabling a more accurate total demand calculation.
Additionally, it is important to monitor demand variations across different channels. E-commerce sales volumes can be more unpredictable due to promotions and seasonality, requiring frequent adjustments to the DAC calculation to prevent stockouts or excess inventory.
Don’t Lose Sales Due to Stock or Customer Service Issues
Losing sales is a big problem in e-commerce. But it’s even worse when sales are lost for the worst reasons.
Stockouts are easy to prevent. The calculations are simple—you just need to prepare in advance to avoid issues.
Another common reason for lost sales is poor customer service. If customers have unanswered questions, the sale is at risk.
The challenge is that providing real-time support to answer minor customer inquiries is difficult. You need both a team and tools to even capture these questions.
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