Safety stock is the minimum level of inventory desired for an item given the expected usage rate & the expected time to receive an order. If an order is placed when the inventory reaches 150 units instead of 100 units, the additional 50 units constitute the safety stock. The expects to have fifty units in stocks when the order arrives. The safety stock protects the firm from stock-outs due to unanticipated demand for the item or to slow deliveries. Increasing the amount of inventory held as safety stock reduces the chances of a stock-out & therefore, reduces stock-out cost over the long run. The level of inventory investment is , however, increased by the amount of the safety stock.

The safety level is ascertained & introduced as a part of inventory management because there is always an uncertainty involved with respect to the time lag , usage rate or any other factor. The assumption of certainty regarding time lag and usage rate may not hold good. Therefore , the firm may face a situation of stock-out even if utmost care has been taken. The safety stock is maintained in order to bail out the firm from any such situation.

The unexpected variation in both the time lag and the demand for the product affect the level of safety stock. The more certain are the pattern of  movement of stock, the less is the safety stock required. If the stock movement is highly predictable, then there is little chance of any stock out occurring. However ,if the stock inflows and outflows are unpredictable, then it becomes necessary to carry additional safety stock to prevent unexpected stock out. The best level of safety stock for a given item depends on how much a stock out costs & on the variability of usage rates and delivery times. If the usage rate & the delivery time can be forecast with high degree of accuracy and if the cost of a stock-out is estimated to be small , then little or no safety stock is needed. If the circumstances are not so favorable, then a significant investment in safety stock will be desirable.         


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