Safety stock and service levels

Safety stock rises with demand variability, with supply lead time and its variability, and with the chosen service level. The last is a policy decision, not a calculation, and it dominates: going from 90 to 95 percent availability costs far less inventory than going from 95 to 99.

The curve is convex, which is why the final points of availability are where inventory strategies quietly become expensive.

In replenishable categories, safety stock protects availability and the goods retain value while they wait. In seasonal apparel, the buffer is bought once and cannot be replenished, and unsold buffer does not carry over: it becomes markdown inventory at the end of the season.

So in apparel the cost of a high service level is not carrying cost. It is markdown, which is a far larger number and shows up in gross margin rather than in working capital.

For basics and core replenishment, a high service level is usually defensible. For fashion and for extended sizes with thin demand data, the same target produces residual inventory that costs more to clear than the lost sales would have cost. That is the calculation that determines how deep a retailer goes in the tails of its size curve.