As a dropshipper, you know to expect the unexpected. Whether it’s demand spikes during the crazy holiday shopping season or your product going viral on TikTok unexpectedly, it’s good to have some of your best-selling items on hand.
However, that requires moving to a hybrid dropshipping model, which comes with its own considerations. With a hybrid model, you keep top-selling items in stock to fulfill demand and then dropship everything else.
This is called safety stock, which is when you keep a little more inventory around for unexpected surges in demand.
Keeping safety stock on hand can work wonders for your supply chain and revenue, but it requires careful planning to pull off.
In this guide, we’ll explain what safety stock is, how to determine a good safety stock level, and best practices for managing hybrid dropshipping safety stock.
What Is Safety Stock?
Also known as buffer stock or backup inventory, safety stock is extra inventory that dropshippers buy and store in a warehouse for a rainy day. The idea is to keep in-demand merchandise on hand in case of tricky situations like:
- A sudden increase in actual demand
- Delays with your usual suppliers
- Supply chain irregularities
- Accidentally placing supplier orders too late
Traditionally, only retailers handled safety stock. After all, one of the biggest benefits of dropshipping is not handling inventory yourself.
However, safety stock gives you more control over your business, especially if you’re having issues with your suppliers.
However, if you want safety stock for your business, you have to embrace a hybrid approach to dropshipping, where you warehouse certain items and dropship the rest.
This can get confusing if you sell hundreds of items a month, which is why it’s so important for hybrid dropshippers to accurately calculate the amount of safety stock you need.
Safety Stock Examples
Few dropshippers want to keep extra inventory on hand, but in some cases, it can make the difference between losing sales and having a record-breaking quarter. Here are just a few examples of the importance of safety stock.
Staying in Stock
Imagine that a dropshipper selling jeans experiences an unplanned spike in sales as part of a Back To School promotion.
Normally, each order would require a few days lead time, but the dropshipper has safety stock ready to go.
By maintaining this buffer stock, they keep up with this increased demand, and shoppers are none the wiser.
Avoiding Supplier Issues
Suppliers sometimes face issues sourcing raw materials. For example, if you sell tech gadgets and your suppliers run out of a certain component, you might not be able to make sales for a few weeks or months.
In this case, keeping a backlog of safety stock helps you ride out supplier issues and continue making sales in the meantime.
Keeping up With Trends
Going viral is every dropshipper’s dream, but it creates supply headaches. A TikTok viral makeup kit could bring in thousands of additional orders overnight.
It’s hard to plan for peaks like this, but safety stock can certainly take some of the stress out of fulfillment as long as you keep enough on standby.
Why Buffer Stock Is Important for eCommerce
Some eCommerce sellers avoid storing any extra inventory, worrying about tying up their resources in unsold product.
That’s a valid concern, but with the right approach, safety stock makes eCommerce dropshipping faster and more profitable. It can even simplify your supply chain, make customers happier, and reduce fluctuations in your business.
Keep Customers Happy
Ninety-one percent of customers won’t return to a store if they have a bad experience — and running out of their favorite items definitely counts as a bad experience.
Dropshipped items aren’t unique, so you need to give shoppers a compelling reason to stay loyal to your store. Guaranteeing a constant supply of product is a great way to do just that.
Safety stock requires more logistics and higher storage costs, but it ensures you keep customers happy and meet demand, no matter what.
Simplify the Supply Chain
COVID-19 showed just how fragile the supply chain can be. Lead time uncertainty and unpredicted market fluctuations can hurt your business, so safety stock is a smart way to mitigate the impact of any disruptions.
Extra inventory acts as a cushion that allows you to keep fulfilling orders without delay, keeping your business moving even if the supply chain experiences lags.
Smooth Out Fluctuations
Every eCommerce business experiences highs and lows. It’s just the nature of the industry. However, these fluctuations make it difficult to forecast demand and earn predictable profits.
Safety stock helps you ride out these natural fluctuations in demand with less hassle. If you suddenly go viral on social media, you can quickly meet customer demand without traditional dropshipping.
Streamline Inventory Management
As many as 75% of all stock-outs happen because of poor ordering and replenishment. Inventory management is far from simple, especially if you’re scaling your dropshipping business.
Inventory management tools like Spark Shipping streamline and automate the process for you, but safety stock is also a must-try. As long as you calculate the proper amount of safety stock, you’ll balance the extra inventory costs while preventing pricey stock outs.
Reduce Lead Times
Anything slower than two-day shipping can feel like an eternity to shoppers. Delayed shipments can lead to lost sales and bad reviews, so speed things up by keeping some safety stock on hand at all times. Safety stock makes hybrid dropshipping lead times less uncertain, giving you more control over the fulfillment process.
For example, if your suppliers experience delays, you can still fulfill customer orders with buffer stock and avoid passing those delays to your customers.
Safety Stock Formula: How To Calculate Safety Stock
It’s so important to accurately calculate safety stock. If you carry too much safety stock, you risk the high costs of overstocking and storage. But if you understock, you still risk running out of inventory and giving shoppers a bad experience.
Accurately calculating safety stock will help you order and store exactly what you need — no more and no less.
Every dropshipping business is different, though. Try these safety stock formulas to see which option is best for your inventory management practices.
Basic Safety Stock Formula
This general safety stock formula accounts for varying demand and lead times in your business:
(Maximum daily usage X maximum lead time in days) - (Average daily use X Average lead time in days)
Maximum daily usage is the number of units you sell in a single day, with max lead time being the longest time it takes you to deliver the product. Essentially, you subtract the average value from the maximum value. This figure gives you an idea of optimal safety stock levels.
Keep in mind that this fluctuates over time and during different peak seasons. You’ll likely need to calculate safety stock a few times a month to make sure you have an appropriate amount of stock to handle demand variability.
For Fixed Stock
If you aren’t in the mood to do complicated math, fixed safety stock is a much simpler (albeit less accurate) way to calculate safety stock. With this method, you keep a fixed quantity of stock around at all times.
This is a simple method, but it doesn’t account for demand fluctuations. However, if you have pretty stable demand, this could be a simple way to calculate safety stock.
For Time-Based Stock
A time-based calculation focuses on ordering enough stock to cover demand over a given period of time.
This is especially helpful during the holiday shopping season when most dropshippers see a spike in demand. In this case, you would use the safety stock formula:
Average Daily Usage X Safety Time Period
For example, if your average daily usage is 50 units and you want to cover ten days of demand, your safety stock would be:
50 units/day X 10 days = 500 units
There are more advanced safety stock formulas out there, like Greasley and Heizer & Render, but they’re much more complicated. If you have significant variations in your business, it’s best to use a safety stock calculator.
Best Practices for Managing Hybrid Dropshipping Safety Stock Levels
Knowing your safety stock number is great, but that alone won’t set your business up for success. Hybrid dropshipping is a different animal altogether that requires changing your mindset and processes.
Follow these best practices to manage safety stock levels as a hybrid dropshipper.
Track Shopper Demand and Lead Times
Demand and lead times are important variables in any safety stock calculation. As long as you know these numbers, you’ll be able to calculate the proper amount of inventory for safety stock.
Use historical sales data and demand forecasts to spot trends and predict future demand. However, demand and lead times fluctuate over time, so regularly track these data points to keep your dropshipping operation moving smoothly.
Run the Numbers Regularly
You can’t calculate safety stock once a year and assume that number will stay constant. From changes in customer expectations to external factors like the economy, you just don’t know what life will throw your way. That’s why it’s important to calculate safety stock much more frequently.
The exact frequency depends on your customers, industry, business variability, and monthly order rates. However, we recommend calculating it at least once a month to make sure your buffer stock levels aren’t too high or too low.
Try to run the numbers before placing additional orders with your suppliers — this will help you avoid storing more safety stock than you need.
Audit Your Safety Stock
How much stock do you have stored away? It’s not unusual for physical inventory counts to differ from what’s in your inventory management software.
Regularly auditing your safety stock inventory will identify discrepancies and keep your inventory data as clean as possible. The exact frequency depends on your business, but many dropshippers audit buffer stock once or twice a year.
Work With Your Suppliers
Dropshippers are only as strong as their suppliers. You rely on these suppliers to store and fulfill orders for you, which means they have a tremendous impact on the customer experience.
Reliable suppliers will improve your lead times and reduce the need to carry as much safety stock, freeing up more capital to invest back into your dropshipping business.
It’s tempting to put your supplier relationships on autopilot, but strong communication is key to maintaining the right amount of safety stock. Over time, you’ll find which suppliers are worthwhile and deliver an awesome experience.
Spread Out Your Stock Geographically
eCommerce shoppers are everywhere, so you need to spread your safety stock out to various warehouses across the country.
Stocking extra product at several warehouses cuts down on your average lead time and speeds up shipping by keeping products closer to your shoppers.
This can get tricky if you’re managing everything in a spreadsheet, though, so use an inventory management system that supports multi-location tracking.
Use Automation Software
Safety stock is incredibly helpful for growing dropshipping businesses, but it adds another layer of complexity to your business. Automation solutions like Spark Shipping put your safety stock on autopilot, giving you the benefit of just-in-case inventory without time-consuming safety stock calculations.
Spark Shipping’s inventory management solution can replenish stock at a strategic reorder point, increasing safety stock before it falls below your threshold. This setup makes it easy to manage buffer stock without holding onto excessive inventory.
Our solution also manages repricing, order fulfillment, order tracking updates, supplier integrations, and much more. It's the best solution to avoiding an out of stock situation and becoming more resilient to natural market fluctuations.
Six Things To Avoid With Managing Safety Stock
Safety stock can be a game-changer for hybrid dropshippers, but it isn’t without its pitfalls. Avoid these common buffer stock missteps to save time and boost profits.
Ignoring Variability
No business stays the same forever, especially in the eCommerce space. There will be natural fluctuations in customer demand, pricing, your competitors, and much more.
Some standard safety stock formulas account for variability, while others don’t. If you see more variability in your business, consider using more advanced formulas that account for changing conditions. Otherwise, you risk stocking for the past, not the future.
Looking at Old Data
Average sales data definitely matters, but you can’t rely on it too much. Market trends, seasonal changes, and customer demand affect your inventory needs. Always look at current demand forecasts and market analysis to store enough safety stock for current conditions.
Holding onto Old Stock
While extra stock can help you through lean times, you can’t hold onto it forever. All products have a lifecycle, and there will be a time when your stock becomes obsolete and unsellable.
It’s best to accept any investment in safety stock at that point as a loss and pivot your strategy. Regularly review your product portfolio and adjust safety stock levels based on each product’s lifecycle stage. Knowing when to cycle stock also gives you more room to welcome new, more in-demand products.
Inconsistent Monitoring
Remember, safety stock levels are never static. They change a lot, so don't skip your annual stock audit or forget to calculate this month’s new safety stock figures. Consistency is the key to success, so set reminders to stay on top of safety stocks.
Poor Supplier Relations
Finding quality suppliers is no picnic. Even the most successful hybrid dropshippers struggle to offer quality service to their customers because of supplier issues.
Poor supplier communication can lead to all kinds of supply chain disruptions, so establish strong relationships with your suppliers. For example, staying in touch with your suppliers even on a monthly basis encourages them to give you a heads up about issues that could affect stock levels.
Doing Everything Manually
Hybrid dropshipping adds more to your already full plate. Instead of relying on suppliers to handle the fulfillment side of your business, you also need to keep an eye on your warehouses and safety stock. That’s just too much to manage with spreadsheets alone.
Whether you dream of creating an eCommerce empire or just want to save more time on your dropshipping business, automation tools are a must.
Solutions like Spark Shipping handle everything from tracking updates to vendor integrations and product management, freeing you up to focus on growing your business, serving customers, and making more money.
Boost Customer Satisfaction With Powerful Automations
Safety stock comes with a few risks, but it can be incredibly beneficial for hybrid dropshipping businesses. Become more resilient and boost customer satisfaction by stashing extra product for a rainy day.
As long as you stock the correct products and quantities, you’ll give customers the speedy, high-quality experience they expect.
However, safety stock requires more tracking and planning to pull off. Instead of managing your business out of a spreadsheet, put everything on autopilot with Spark Shipping. Our inventory management features ensure you’re always able to fulfill orders through the power of one-to-many vendor mapping.
It’s time to streamline safety stock. Request a demo now to automate your hybrid dropshipping business.