Buffer inventory

From CEOpedia | Management online

Buffer Inventory, also known as buffer cushion, safety inventory or buffer stock, it is one of the types of inventories that a company should possess in order to function well. This type of inventory is the most commonly used protection against stock shortages or sold outs. Which are caused by the situations of being uncertain, unable to predict flow of commodities or when unexpected circumstances regarding stock occur.

Another words buffer inventory is an additional amount of goods that companies keep at the disposal for themselves. Buffer stock is being kept to protect for example, when market demand of goods exceeds the company's predictions. When the manufacturing has a break-down. Also when a supplier's shipment arrives later, shorter in amount or a lot of goods were damaged during transportation[1].

Estimating a size of good buffer inventory

On the one hand a good buffer needs to be large enough to enable a company to serve its customers by using that buffer without them knowing about it, or having any inconveniences. Company may have terrible delivery chains or unpredictable customer demands. However, as long as that company manages to easily satisfy its clients demands, even by using buffer inventory, it is doing a good job so those clients won't give up on using its services. On the other hand, a company also doesn't want to have too big amount of buffer inventory. If it does, it is tying up a lot of money. Money that could be used for something else. Also the company is wasting too much space in stock for the buffer, because those goods has to be put somewhere[2].

To correctly set buffer inventory level, the company should take under consideration the major components, which affects inventory level. Those components include for example: expected market demand and its variability; time within the shipment arrives and its variability, desired level of supplier service, and also level of company's service. Nowadays, a company may calculate size of a buffer on its own or use a commercial software to calculate the inventory levels for her[3].

Calculation of the buffer inventory size

There is no universal method for calculating the size of safety buffer. Instead of, there is a lot of different methods used for the estimation of safety stock's largeness, a few examples are listed below[4]:

  • It is a percentage of predicted market or manufacture demand.
    Instance: The good's demand equals 200 units during a month, company planned a buffer of 10% of the demand, so the buffer is 10% of 200 (200x0,1 = 20 units)
  • It is a constant amount.
    Instance: buffer equals 50 units for item A, and 60 units for item B.
  • It is a sufficient amount to cover demand throughout a specific period of time - days of supply.
    Instance: The demand for goods is 200 units per month and the buffer is designated as a sufficient amount for 10 days of selling, the buffer should be: (10days of selling x200):30 days of the month=67 units.
  • It is an average difference between predicted and actual level of sale.
    Instance: The average sale predicted for half of the year was 100 units per month and actual level of sale during that half of the year was 80 units per month. Average difference equals 20 units, so this will be the size of company's buffer .

Examples of Buffer inventory

  • Raw materials: Companies who have buffer inventory of raw materials are able to quickly respond to any sudden increase in demand or a sudden disruption in supply. For example, a manufacturer of shoes that keeps a certain amount of leather, rubber and other materials stocked in its warehouse can quickly respond to a sudden increase in orders by producing more shoes in a shorter period of time.
  • Finished goods: Companies also keep a buffer inventory of finished goods to ensure that they can respond quickly to any sudden spike in demand and satisfy customer requirements. For example, a retailer of consumer electronics may keep a certain amount of television sets and other products in its store or warehouse to ensure that it can meet customer orders quickly.
  • Components: Companies also keep a buffer inventory of components, such as spare parts, to ensure that it can quickly respond to any sudden breakdowns or repairs that need to be done. For example, a manufacturer of car engines may keep a certain amount of spare parts in its warehouse to ensure that it can quickly respond to any sudden repairs that need to be done.

Advantages of Buffer inventory

Buffer inventory is an essential part of inventory management as it ensures that a business has the necessary supplies in stock to meet customer demands. The advantages of buffer inventory include:

  • Cost Savings: Buffer inventory helps to reduce the cost of reordering and other costs associated with stock-outs. By keeping enough inventory on hand, businesses can minimize the cost of ordering and restocking products, while still ensuring they have enough stock to meet customer needs.
  • Avoid Stockouts: Buffer inventory helps to ensure that businesses do not experience stockouts, which can lead to dissatisfied customers and lost revenue. Keeping an adequate buffer inventory helps businesses ensure that they have enough products on hand to meet customer demand.
  • Improved Customer Service: Buffer inventory helps businesses provide better customer service. By having enough inventory on hand to meet customer needs, businesses can provide faster delivery times and better customer service. This can help to increase customer loyalty and sales.
  • Improved Flexibility: Buffer inventory helps businesses be more flexible and responsive to changing customer needs. By having an adequate buffer inventory, businesses can quickly adjust their production levels to meet changing customer demand. This can help businesses remain competitive and profitable.

Limitations of Buffer inventory

Buffer inventory is an important type of inventory that a company should possess in order to ensure smooth operation. However, it comes with some limitations, including:

  • High Cost: Buffer inventory carries a high cost to maintain, as it requires a large amount of money to purchase and store large quantities of inventory.
  • Space Requirements: A large amount of space may be required to store the large quantities of inventory, which may not always be available.
  • Obsolescence: If the inventory stored as buffer inventory remains unused for a long period of time, it may become obsolete and thus, difficult to sell.
  • Misallocation of Resources: Buffer inventory requires a lot of resources such as money, space, and manpower to manage and maintain, which can be misallocated from other areas of the business.

Other approaches related to Buffer inventory

Buffer inventory is an important element of a company's inventory management, but there are other approaches that can be used to ensure that the company has enough stock to meet customer needs. These include:

  • Just-in-Time (JIT) Inventory: JIT inventory is a system of inventory management that focuses on reducing the amount of inventory and ordering only what is necessary to meet customer demand. This approach reduces costs associated with storing, handling, and shipping inventory.
  • Kanban Inventory: Kanban inventory is a system of inventory management that uses a visual card or signal to indicate when inventory is needed or when inventory should be replenished. This approach can help to reduce the amount of excess inventory and improve overall inventory management.
  • Vendor-Managed Inventory: Vendor-managed inventory is a system of inventory management that involves the vendor working with the company to manage the inventory. The vendor is responsible for ordering, stocking, and delivering the inventory to the company, which helps to reduce costs associated with managing the inventory.
  • Automated Inventory: Automated inventory is a system of inventory management that uses technology to manage the inventory. Automation can help to reduce costs associated with tracking and managing inventory, as well as reduce the amount of time needed to manage the inventory.

In conclusion, buffer inventory is just one approach to inventory management, but there are a variety of other approaches that can be used to ensure that a company has the right amount of inventory to meet customer needs. Each approach has its own advantages and disadvantages and should be considered when developing an inventory management strategy.

Footnotes

  1. ↑ Bragg S. M., (2007), subchapter: 2.5
  2. ↑ Chowdhary M., (2009), p:42-43, 65-67
  3. ↑ Almyta Control Systems, (2019)
  4. ↑ Kiisler A., (2014), p:57


Buffer inventory — recommended articles
Two-tier inventory control — Merchandise inventory — Maximum stock level — Operating supplies — Cycle stock — Safety stock — Optimization of the production run-length — Ordering cost — Inventory in transit

References

Author: Artur Bućko

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