Safety Stock:

The model developed earlier has supposition of constant demand and that is also known in advance. In mostly situations demand varies daily. Therefore, there arises a requirement of maintaining a safety stock that provides some level of protection against stock outs. Safety stock may be defined as the amount of inventory carried in addition to the expected demand. For the normal distribution case, it can be measured as mean. To demonstrate the meaning of its definition, let us suppose our average yearly demand is 1000 units and we expect next year to be the similar. Now in case next year we carry 1100 units then we have 100 units of safety stock.

Safety stock may be determined from different criteria. The most common utilzed approach followed by a firm is that simply state that a certain number of weeks of supply be kept in safety stock. The probability approach is also among one of the general approaches followed by industries.