Buffer inventory

Buffer inventory
See also
Two-tier inventory control Maximum stock level Bin card Order point Trade allowance Merchandise inventory Sales history Sales potential Inventory on hand

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.

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.

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.

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:

• 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 .

References

• Almyta Control Systems, (2019), ABC Inventory Software.
• Bragg S. M., (2007), Throughput Accounting: A Guide to Constraint Management., John Wiley & Sons, subchapter: 2.5,
• Chowdhary M., (2009), Constraint Management: Throughput, Operating Expense and Inventory., Global India Publications, p:42-43, 65-67,
• Kiisler A., (2014), Inventory management – basic concepts., LogOnTrain Summer School, p: 4, 12, 57,
• Reyes J., Alvarez K., (2016), Dynamic Buffer Management for Raw Material Supply in the Footwear Industry., Journal of Industrial and Intelligent Information, 4(1), p: 1-8,

Author: Artur Bućko