Buffer stock, also known as safety stock, is extra inventory that businesses can keep to meet customer demands when there is sudden high demand or supplier delays.
More than 75 percent of businesses experience at least one supply chain disruption each year in this unpredictable global market. So, most businesses can rely on buffer stock to combat this issue. Through the lens of various sectors’ examples, this article comprehensively reviews buffer stock’s definition, its significance, and other strategic aspects.
What Is Buffer Stock?
Buffer stock is the extra stock or inventory maintained to meet sudden demand spikes or supply variations.
There can be unexpected demand for the product in the market. If the business does not keep extra stock or products in the warehouse storage, it can negatively impact customers. It even decreases the band’s reputation in the market. So, safety stock prevents stockout problems and meets customer needs immediately.
A business can utilize its safety stock at any point in the supply chain process. Its main aim is to maintain the sales continuously.
Calculation Formula Of Buffer Stock
Buffer Stock = Z × σltWhere:
Z = Service level factor
σlt = Standard deviation of demand during lead time
Objectives Of Buffer Stock
The key objectives of buffer stock are as follows.
1. Prevent Stock out
Inventories can run out in the warehouse, which leads to lost sales. A business can keep some extra inventory or buffer stock in the warehouse to fulfill orders continuously.
2. Mitigate Risks From Supply Chain Disruptions
There can be unexpected supply chain disruptions like natural disasters, supplier failures, and geographical issues. These disruptions can cause problems and delays in production or goods flow. Businesses can keep a buffer stock for smooth supply chain operation, even during disasters or strikes.
3. Maintain production flow in manufacturing
The manufacturing process depends on the timely availability of raw materials. So, the manufacturing process can be halted if the raw materials are unavailable. It can further create supply chain delays and decrease customer satisfaction. Businesses can keep extra materials to maintain production flow in manufacturing.
4. Enhance customer satisfaction
Businesses can keep extra inventory or buffer stock in the warehouse to provide continuous order fulfillment, enhancing customer satisfaction.
Strategic Importance In Different Industries
1. E-commerce And Retail
Today, customers expect fast delivery of their ordered products and a seamless shopping experience from the site. Safety stock plays a vital role in meeting customer expectations. For example, retailers face high demand in a particular season. Safety stock enables the product to be always available to meet customer demands.
2. Pharma And Healthcare
There should always be availability of medicines and pharmaceuticals in the pharma and healthcare industry. Hence, most hospitals keep oxygen cylinders and emergency drugs as a stock to respond quickly to emergencies.
3. Manufacturing And Automotive
A delay in raw materials can bring the assembly line to a halt in both the manufacturing and automotive industries. So, industries keep a stock of steel or engine parts to prevent production operations.
Factors Affecting Buffer Stock Levels
1. Lead Time
It is the time between order placement and reviving of the products—a business needs to keep a high buffer if the lead time is extended.
2. Demand Variability
It involves the unpredictability of customer demand for a specific period. A business needs to keep more stock if the product has unpredictable market demand.
3. Supplier Reliability
If the supplier delays delivering raw materials, the business must store more stock.
4. Seasonal Trends
A business can keep more buffer stock, especially when there is high demand in a particular season.
Buffer Stock Vs. Safety Stock Vs. Reserve Stock
- Buffer Stock: The inventories are stored in the warehouse to meet unexpected product demand in the market.
- Safety Stock: Safety stock is the inventory that is utilized when actual demand exceeds the forecast.
- Reserve Stock: Here, the business keeps a reserve stock to utilize in emergencies.
Benefits Of Maintaining Safety Stock
There are various benefits of buffer stock, which are underlined below.
- Prevent Lost Sales: Sometimes, customer demands increase more than expectations. It can lead to lost sales if the businesses do not keep safety stock in the 3PL warehouse.
- Increases Customer Trust And Retention: Constant product availability can build trust in customers’ minds and brand reputation.
- Supports Uninterrupted Operations: Safety stock ensures that production does not stop because of inadequate raw materials.
- Provides Cushions For Forecasting Errors: Demand forecasting can involve errors. Safety stock balances the gap between the estimated and real product demand.
Challenges & Risks of Safety Stock
- High Holding Costs: Maintaining excess buffer stock occupies more warehouse space and can increase the holding costs of the business.
- Risk Of Obsolescence: Certain products, like fast-moving consumer goods, can become outdated if held longer.
- Inventory Mismanagement: A lot of stock can lead to inefficient tracking and handling of goods.
Final Words
Businesses should not consider buffer stock as a surplus in the warehouse. Consider it a necessity in the risk-prone supply chain environment. Companies can keep a safety stock to avoid stock out issues and enhance customer satisfaction.
AAJ Supply Chain Management
