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Buffer stock or safety stock act as insurance against fluctuating demands in the market. These stocks help eliminate the hassle of shortage in stock. With sufficient stock in reserve, the chances of turning away customers due to depleting inventory are minimum. Safety stock covers you until the next batch of stock which is ordered arrives and hence serves demands.
It is a buffer amount which serves uncertainties such as inventory forecasts or inaccurate demand, financial constraints, supplier delays, etc. These stocks help mitigate the consequences or risks of stockouts. You continue with your supply chain in the usual way even when cycle stock may run out.
Safety stock is important in business for the following reasons:
Reasons which suggest safety stock improves inventory management follow as under:
In order to calculate buffer stock, the following safety inventory formula is useful:
[maximum daily use x maximum lead time] – [average daily use x average lead time] = safety stock.
For example:
Here, it is necessary to determine the average daily use for a product and multiply it by its average lead time (how long it takes, in days, for stocks to arrive once you place an order). Then subtract this number from your maximum daily use times and multiply it by your maximum lead time. The result is the safety stock number for that product.
If the maximum number of Product X sold by a company is 80 and the average number of products sold in a day is 45. Whereas, the maximum time taken to receive Product X after placing a fresh order is 10 days and the average time taken to receive the product is 6 days. The safety stock calculation will be as follows:
(80 x 10) - (45 x 6) = 530
Some examples of safety stock may include the following:
Following are the common challenges and risks to address regarding buffer stock:
When a company maintains a safety stock, it awaits both pros and cons of the given calculation system. Therefore, it is necessary to be mindful of both these concepts described above to ensure keeping a steady buffer stock to serve the demand surge whenever it occurs.
It is essential to determine the ideal level of safety or buffer stock to establish it as an asset rather than a liability for a certain company.
A good buffer stock level depends on current and future demand, supplier lead times, sales volume and inventory velocity. However, as a thumb rule, the buffer stock amount should be the amount of inventory used on a per-day basis multiplied by the lead time in days.
The following three factors mainly impact buffer stick- order period, uncertainty in the forecast, and the confidence factor of the product.
Yes, the statement is true regarding buffer stock.