The Confusion That Costs You Money
Walk into most planning meetings and you'll hear "target inventory" and "safety stock" used interchangeably. They're not the same thing, and confusing them leads to either too much inventory or too many stockouts.
Understanding the difference isn't academic—it directly affects your cash flow and customer service. Let's clear it up.
What Safety Stock Actually Is
Safety stock is your buffer against uncertainty. It's inventory you hope you never need to use. The purpose of safety stock is to protect you when things don't go as planned: demand spikes unexpectedly, suppliers deliver late, or quality issues force you to reject a shipment.
Think of safety stock as insurance. You don't want to use your insurance—you want it there just in case. Your planning assumes you'll never dip into safety stock under normal conditions.
Safety stock is calculated based on:
- How variable your demand is
- How reliable your suppliers are
- What service level you want to maintain
A product with steady demand and reliable supply needs less safety stock than a product with volatile demand and inconsistent suppliers.
What Target Inventory Actually Is
Target inventory (sometimes called target stock level or maximum inventory) is the level you want to have right after receiving a replenishment order. It's your planned ceiling.
Target inventory includes:
- Expected demand during the next order cycle
- Safety stock buffer
- Any additional buffer for ordering efficiency
The key difference: target inventory is where you plan to be at specific points in time. Safety stock is a minimum buffer you try not to breach.
The Relationship Between Them
Here's how they work together:
Target Inventory = Expected Demand During Order Cycle + Safety Stock
When you receive a shipment, your inventory should be at or near your target level. As you sell products, inventory drops. When it hits your reorder point, you place another order. By the time that order arrives, inventory should be back up to target level.
Safety stock is the floor you don't want to breach. Target inventory is the ceiling you refill to.
Example:
- Your weekly demand is 100 units
- Your order cycle is 2 weeks (you order every 2 weeks)
- Your safety stock is 50 units
- Your target inventory is: (100 × 2) + 50 = 250 units
Right after a shipment arrives, you have 250 units. Over the next two weeks, you sell 200 units, dropping to 50 units (your safety stock). Your new shipment arrives, bringing you back to 250 units.
Why Getting This Wrong Hurts
If you treat safety stock as target inventory:
You end up with too little inventory. Ordering to maintain just 50 units when you need 250 means constant stockouts. Your safety stock gets consumed immediately instead of being held in reserve.
If you treat target inventory as safety stock:
You end up with way too much inventory. Holding 250 units as a minimum buffer when you only need 50 means cash is tied up unnecessarily. Carrying costs eat into your margins.
Setting Your Safety Stock
Calculate safety stock based on uncertainty, not demand volume:
1. Determine your desired service level. Most brands target 95-97% on A-items.
2. Calculate demand variability. Look at the standard deviation of your demand over the past 3-6 months.
3. Factor in lead time. Longer lead times require more safety stock.
4. Account for supply variability. If your supplier is unreliable, add buffer for that.
The standard formula:
Safety Stock = Z × σd × √LT
Where Z is your service level factor, σd is demand standard deviation, and LT is lead time.
For a simpler approach:
Safety Stock = (Max Demand - Avg Demand) × Lead Time
Setting Your Target Inventory
Target inventory depends on your ordering strategy:
For fixed order interval systems (you order every X days):
Target Inventory = (Average Daily Demand × Order Interval) + (Average Daily Demand × Lead Time) + Safety Stock
For fixed order quantity systems (you order the same amount each time):
Target Inventory = Reorder Point + Order Quantity
Where Reorder Point = (Average Daily Demand × Lead Time) + Safety Stock
Different Approaches for Different Products
Not every SKU needs the same treatment:
A-items (your best sellers):
- Higher safety stock (95-97% service level)
- Shorter order cycles (more frequent ordering)
- Tighter target inventory management
- Review weekly
B-items (moderate sellers):
- Moderate safety stock (90-95% service level)
- Longer order cycles
- Less frequent review
- Review biweekly or monthly
C-items (slow movers):
- Lower safety stock (85-90% service level)
- Longer order cycles
- Higher target inventory relative to demand (to hit minimum order quantities)
- Review monthly or quarterly
Common Mistakes to Avoid
Using the same target for all seasons. Your target inventory should increase before peak season and decrease after. Safety stock may also need seasonal adjustment if demand variability changes.
Setting target once and forgetting it. Demand patterns change. Review targets quarterly at minimum.
Ignoring minimum order quantities. If your supplier requires 500-unit minimums but your target is 300, you'll always overshoot. Adjust your targets to align with ordering realities.
Not accounting for in-transit inventory. Your target is the level you want after receiving orders. If you have inventory in transit, your effective position is higher than what's on the shelf.
Treating all channels the same. DTC inventory might need different targets than wholesale inventory. Amazon FBA has its own considerations.
A Practical Framework
Here's a simple framework for a product with:
- Average daily demand: 20 units
- Lead time: 14 days
- Order cycle: 7 days
- Demand standard deviation: 5 units/day
- Target service level: 95%
Safety Stock Calculation:
Service factor for 95% = 1.65
Safety Stock = 1.65 × 5 × √14 = 1.65 × 5 × 3.74 = 31 units
Target Inventory Calculation:
Cycle demand: 20 × 7 = 140 units
Lead time demand: 20 × 14 = 280 units
Target = Cycle Demand + Safety Stock = 140 + 31 = 171 units
Reorder Point:
Reorder Point = Lead Time Demand + Safety Stock = 280 + 31 = 311 units
Wait—that doesn't look right. Target inventory (171) is less than reorder point (311)?
This is actually correct for a fixed order interval system. Your target of 171 is what you order UP TO each cycle. Your reorder point in this case is time-based (every 7 days), not inventory-based.
For a fixed order quantity system, your target would be:
Target = Reorder Point + Order Quantity = 311 + 140 = 451 units
This is why understanding your ordering system matters when setting targets.
Key Takeaways
- Safety stock is your buffer against uncertainty—the minimum you try not to breach
- Target inventory is your planned maximum level after replenishment
- Target Inventory = Expected Cycle Demand + Safety Stock
- Calculate safety stock based on variability, not demand volume
- Different products need different target and safety stock levels
- Review and adjust both quarterly at minimum
Frequently Asked Questions
Can target inventory ever equal safety stock?
Only if you're ordering continuously with zero order cycle—essentially a just-in-time system. In practice, target inventory should always exceed safety stock by at least one order cycle's worth of demand.
How do I handle products with minimum order quantities?
If your MOQ is larger than your target inventory, you'll need to order more than one cycle's worth each time. Adjust your target to be at least MOQ + Safety Stock, and extend your order cycle accordingly.
Should I set different targets for different warehouses?
Yes. Each fulfillment location should have its own targets based on the demand it serves, its lead times, and its role in your network. A central DC might hold more safety stock than regional warehouses.
How often should I review target inventory levels?
Review quarterly at minimum. Review monthly for highly seasonal products or volatile categories. Review immediately whenever you see significant demand changes or supply chain disruptions.
What's the relationship between target inventory and days of supply?
Days of supply equals your inventory divided by average daily demand. Target inventory can be expressed as target days of supply: Target Days = Target Inventory / Average Daily Demand. Many planners find it easier to set targets in days rather than units.