However, everything comes with a price. The benefits of safety stock must be evaluated against the potential costs incurred by holding too much safety stock. Safety stock ties up cash which could be used for the other parts of a company's operations. So getting the optimal amount of safety stock to balance safety and efficiency is really pivotal to a company's development.
Calculating the optimal amount of safety stock is a blend of art and science. A supply chain guru with more than 20 years of supply chain management experience may easily come up with a number out of intuition. However, as a fresh grad out of management school, how can we get the number in a scientific/mathematical way?
International logistics provider DHL says the optimal level of safety stock is determined by four factors: