Buffer inventory is a portion of a company's merchandise that is sometimes referred to as safety stock. These terms can be used to refer to any goods that a company has on site or en route that exceeds its current needs. Safety stock can be beneficial because it can help to ensure consistency of availability to consumers, but there may be drawbacks, such as the inability to sell the extra supplies.
To understand what safety stock is and the role that it can play, it is best to first understand what inventory is. Companies that sell goods commonly keep a certain amount of those goods on hand for immediate delivery to customers. For example, a shoe store is likely to have a certain number of shoes on site so that an individual who is interested in making a purchase does not have to wait to obtain the desired items. These stocks are known as inventory.
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The amount of inventory that a company maintains is normally based on its need. If a shoe store generally sells 600 pairs of shoes in July, then it would likely have approximately that many shoes in stock during that month. There are some instances, however, when a business may decide to order more merchandise than necessary. This is considered buffer inventory, and it can serve as a major benefit.
One of the benefits of buffer inventory is that it can provide stability. This is possible because companies can immediately and effectively handle unexpected surges in demand. This reduces the risk that a company will miss opportunities to serve consumers who may go elsewhere if their demands are not immediately satisfied.
Also, there are a wide range of circumstances that can cause delays when companies attempt to replenish their inventory. Examples include inclement weather, supply shortages, and disputes with suppliers. Maintaining buffer inventory allows a company to reduce the probability that it will experience outages of desired goods. Some companies may develop a buffer supply because they are taking advantage of special offers from suppliers, such as sales, rebates, or bulk discounts.
There may, however, be some drawbacks associated with buffer inventory. One of them is the task of storing extra merchandise. If a company does not have adequate space, the additional merchandise may be stored in a manner other than that which is recommended, or a company may incur storage expenses. Another drawback is that a company may invest in buffer inventory, but demand for all of the goods may never materialize. For this reason, careful consideration should be given to the amount of buffer inventory that a company acquires.