A significant increase in demand is what most businesses would call a nice problem to have. Who wouldn’t want more revenue streaming in? But without enough available inventory, a sudden influx of orders can lead to delays in production or fulfillment, missed sales, increased costs, and ultimately, unhappy customers. That’s where buffer stock comes into play. Buffer stock is additional inventory that companies keep in reserve as a cushion to deal with unexpected demand increases. But reliable data and inventory management systems are needed to determine what’s the right level of buffer stock to have available without creating other problems, such as increased carrying costs.

What Is Buffer Stock?

Buffer stock is the term for a surplus of inventory that a company, often a retailer or manufacturer, keeps on hand to meet unexpected or abrupt increases in short-term demand, such as during the holiday season or promotional periods. This additional inventory—which could be finished goods waiting to be shipped or sold by a retailer or raw materials in a manufacturer’s facility—helps companies continue to meet customer demand.

Buffer Stock vs. Safety Stock

The terms buffer stock and safety stock are often used interchangeably because they both describe excess inventory that a company may keep on hand to deal with unexpected situations. However, they’re not the same thing. As opposed to buffer stock, safety stock is additional inventory that a company has in reserve to deal with unexpected challenges on the supply side of the equation. Safety stock comes in handy in the event of unexpected supply chain disruptions, transportation delays, supplier issues and the like. Both exist for the same overarching reason: to make sure a company has enough inventory to meet demand and fulfill orders in a timely fashion.

Buffer Stock vs. Anticipation Inventory

Buffer stock is also similar to anticipation inventory, as they both refer to extra inventory a company has available for a specific purpose. Again, though, there’s an important distinction. While buffer stock exists to help a company meet unexpected increases in demand, anticipation inventory is maintained to help meet expected or forecasted increases in demand—say, a seasonal bump in lawnmower sales or an anticipated strong holiday season.

Key Takeaways

  • Buffer stock helps businesses meet unexpected increases in demand.
  • By investing in additional inventory, companies can avoid stockouts, maintain greater cost stability, and keep production lines moving.
  • Challenges include increased overhead costs, difficulties forecasting the unexpected, and risks of spoilage or product obsolescence if buffer stock is unused.
  • There are several methods for calculating the optimal levels of buffer stock, depending on the situation.
  • Investing in the right systems and adopting best practices can help companies determine appropriate buffer stock levels.

Buffer Stock Explained

In some cases, a change in demand is predictable—not many people buy artificial Christmas trees in June. In other cases, an abrupt surge in demand comes out of the blue, as happened with toilet paper during the pandemic. Having a buffer against the unpredictable ensures that businesses can accommodate a rise in demand at a reasonable cost and in a timely manner. That’s exactly what buffer stock is: inventory that a company maintains specifically to deal with unanticipated upticks in customer demand.

While it may not always make sense for certain categories of goods or raw materials, such as perishable items, buffer stock can provide peace of mind. And when the stock is used, it pays off in very real ways by enabling companies to meet demand, increase sales, keep their manufacturing facilities up and running, and maintain customer satisfaction. In fact, 78% of respondents to McKinsey’s 2023 Supply Chain Pulse survey said they had increased their inventory buffers.

Still, holding this additional inventory comes with certain costs and risks. So, it’s important to have a good inventory management system in place and to explore the best processes and calculations for determining when and how to invest in buffer stock as a hedge against demand surges.

Buffer Stock Benefits

The market is often unpredictable. Buffer stock can serve as a safeguard to prevent shortages when unanticipated spikes in demand happen. While keeping additional inventory on hand without a clear idea of when it might be needed comes at a cost, it can offer some worthwhile benefits, including:

  • Avoidance of shortages and stockouts: Sudden increases in demand may theoretically seem like a good thing, but shortages and stockouts, whether of goods for sale or raw materials, parts, or components, aren’t. Demand forecasts may miss the mark, so buffer stock can be a great method of preventing running out of what’s needed.
  • Cost stability: Stockouts can lead to greater expenses resulting from last-minute orders and rushed shipments. Maintaining buffer levels of inventory can stabilize costs, thereby improving financial performance.
  • Supplier discounts: Companies purchasing extra goods or materials is a boon for their suppliers. In some cases, suppliers will offer cost savings to their customers as an incentive to place bigger orders.
  • Production continuity: Holding on to extra stock to compensate for unanticipated upticks in demand helps keep production lines humming. After all, running out of necessary materials brings production to a screeching halt.
  • Workforce retention: Instability in production inevitably has an impact on manufacturers’ employees. Companies may have to send workers home if they run out of materials to maintain continuity of production, and that can prompt staff to seek more stable employment elsewhere. Maintaining a level of buffer inventory, therefore, can have a positive effect on employee retention.
  • Improved strategic planning: Buffer stock enables companies to improve strategic planning by shielding them from demand fluctuations and supply chain disruptions, allowing for more accurate forecasting, higher operational efficiency, and enhanced customer service.
  • Inventory management flexibility: Having buffer stock creates flexibility in terms of inventory management. Companies with this kind of reserve are more likely to be able to respond not only to surges in demand but to special orders. It also gives companies the option to make large bulk purchases, which, as noted above, can result in supplier discounts.

Buffer Stock Limitations

Though buffer stock can provide a safety net against unexpected demand spikes, it’s not without its drawbacks. Companies can’t simply stockpile inventory indiscriminately because there are significant costs and risks associated with carrying excess stock, including financial implications, product-specific constraints, and forecasting challenges. Understanding these factors is crucial for developing an effective and balanced inventory management approach. Challenges include:

  • Increased overhead costs: Keeping too much inventory in bulk can be a money-losing proposition. Inventory carrying costs almost always go up as stock is added. This includes expenses for storage, labor, rent and insurance, as well as depreciation costs that can result from damaged, expired or outdated goods.
  • Spoilage: Holding significant buffer stock for perishable inventory, such as food, flowers, and cut Christmas trees, may not make sense. Once these items are past their prime, they’ll no longer serve their intended purpose. Therefore, companies must consider the shelf life of products before purchasing them in greater quantities ahead of potential unexpected increases in demand.
  • Inventory obsolescence: Similarly, buffer inventory can become obsolete if not used within a certain period of time. This might apply to technology devices or systems that are frequently updated, even the season’s hottest toys. And inventory obsolescence will result in sunk costs, write-offs, and other wasted spending.
  • Forecasting issues: Accurate inventory forecasting is essential for meeting customer demand, boosting revenue, and keeping costs low. This is typically done by analyzing historical data, trends, and anticipated future events. Still, predicting the unpredictable is an unavoidable challenge when it comes to planning buffer stock levels.

The Role of Buffer Stock in Robust Inventory Management Systems

The primary goal of maintaining buffer stock is to cushion a business against upticks in demand that it wouldn’t be able to meet with its normal inventory levels. As such, it’s an important aspect of any inventory management system.

Calculating optimal levels of buffer inventory creates greater stability for a business, reducing the risk of stockouts while also ensuring against overstocking, which can result in increased holding costs and a decline in profitability. Rather than having inventory managers running amok with their hair on fire in response to an unanticipated increase in demand, a buffer stock strategy can ensure that the business maintains its operational efficiency, keeps production costs in check, and, perhaps most importantly, maintains customer satisfaction.

5 Considerations When Determining Buffer Stock Levels

While the benefits of maintaining buffer stock may be apparent, determining the right levels can be a complex undertaking. Certain capabilities must be in place and several factors well understood in order to make the best, data-driven decisions about how much additional inventory to hold in a given situation. These considerations include:

  1. Accurate forecasting: Good demand forecasting plays a central role in estimating the amount of buffer stock a business should have on hand and the timing for when to purchase. Although this backup inventory is intended to deal with unforeseen increases in sales or demand, the more a business can home in on what that might look like, the more it can avoid overspending on buffer inventory levels and associated expenses and the better it will be able to mitigate risks.
  2. Lead time: Buffer stock decisions should also take into account the lead time needed for the products involved. This includes the time it takes to produce the items, as well as the time they will spend in transit. Most methods for calculating buffer stock levels include lead times, so companies must have an accurate understanding of this number when planning buffer stock strategies. Without accounting for lead times, the buffer stock may arrive too soon or too late. This will also be of particular importance in determining when to replenish buffer inventory.
  3. Refill frequency: Buffer stock shouldn’t just sit in a warehouse indefinitely; that would defeat its purpose. Ideally, it will be used to meet increased demand and then replaced. As such, companies need to develop solid inventory replenishment plans that address refill frequency.
  4. Perishability of products: The shelf lives of items kept in buffer stock is another crucial consideration. Items like fresh fruit and produce, meat, and dairy products will eventually spoil and be unusable to meet demand. Inventory managers must plan particularly carefully when building buffer stocks of these categories of goods.
  5. Seasonality: Vastly overstocking seasonal items, such as puffer coats for winter, swimsuits for summer, or the hottest toy for the holiday season, is a practice businesses try to avoid because they may have to sell these unsold items at a huge discount, write them off, or pay to store them for another year. So, seasonality must be considered when keeping buffer stock on hand. A business would not want to keep the same level of buffer stock for items most likely to fly off shelves around the holidays as they would in the spring, summer, or fall, for example.

How to Calculate Buffer Inventory Levels

A buffer stock strategy is most effective if decision-makers can determine the optimal volumes of inventory a business should have on hand. Otherwise, the company may spend too much on the additional inventory, on the one hand, or risk running out of stock, on the other. Several methods exist for calculating buffer stock levels; which is best depends on a company’s particular needs. Worth noting is that, in almost all the following approaches for calculating buffer stock levels, a company will need to know the lead times for the items in question.

Safety Stock Calculation

This most basic of the buffer stock calculations—actually referred to as the safety stock formula—works well for those looking for a simple method of determining buffer stock levels for a particular item. Keep in mind that it may not be nuanced enough for certain situations.

The safety stock calculation involves multiplying the average daily usage of an item (average number of units sold or used in a day) by the average lead time for that item, and then subtracting that figure from the result of multiplying the maximum daily usage of the item (the maximum number of units sold or used in a day) by the maximum lead time for the product. The end result indicates the amount of buffer stock to put in place. The formula looks like this:

Buffer stock = (Max daily sales or usage – Max lead time) – (Average daily sales or usage x Average lead time)

By subtracting the average scenario from the maximum scenario, the formula provides a buffer stock level that can handle peaks in demand or longer-than-usual lead times. This calculation allows companies to balance customer service levels (avoiding stockouts) with inventory carrying costs (not holding excessive stock).

Let’s consider a hypothetical electronics retailer as an example. The retailer wants to determine how much buffer stock of its popular smartphone model it should keep on hand. The safety stock formula would be applied like so:

  • Step 1: Calculate the maximum scenario (25 units x 14 days) = 350 units
  • Step 2: Calculate the average scenario (15 units x 10 days) = 150 units
  • Step 3: Subtract average from maximum

Buffer stock = 350 units – 150 units = 200 units

The calculation shows that our retailer should maintain a buffer stock of 200 units of its smartphone to protect against potential stockouts due to unexpected demand spikes. This buffer stock would allow the store to handle a period of maximum demand (25 units per day) for the maximum lead time (14 days) without running out of stock, even if its supplier takes longer than usual to deliver new inventory.

Heizer and Render’s Method

Created by professors Jay Heizer and Barry Render, coauthors of “Operations Management: Sustainability and Supply Chain Management,” this buffer stock calculation is particularly useful for companies dealing with inconsistent suppliers or manufacturers, where the primary concern is fluctuation in delivery times rather than demand variability. The formula for this method is:

Buffer stock = Z (desired service level factor) x σLT (standard deviation of lead time)

In this formula, the standard deviation of lead time measures how much actual delivery times typically deviate from the average lead time. By adjusting the service level factor (the probability that a stockout will not occur), companies can set their desired level of protection against stockouts, with higher values providing greater security but also increasing inventory carrying costs. This method allows businesses to balance their tolerance for stockout risk against the reliability of their supply chains, helping them maintain appropriate inventory levels to meet customer needs while managing costs effectively.

Let’s revisit our hypothetical electronics retailer and what it knows to be true about its popular smartphone:

  • Average lead time for restocking: 10 days
  • Standard deviation of lead time (σLT): 2 days
  • Desired service factor (Z): 1.65, a commonly used value corresponding to a 95% service level

Using Heizer and Render’s method, the formula would look like this:

Buffer stock = 1.65 x 2 days = 3.3 days

Based on this calculation, our retailer should maintain enough buffer stock to cover 3.3 days of sales. If it sells an average of 20 smartphones per day, its buffer stock should be: 3.3 days x 20 smartphones per day = 66 smartphones. This buffer stock will help the retailer maintain a 95% service level factor, protecting against stockouts due to variable lead times from its supplier. The store can adjust the service level factor based on its risk tolerance and the costs associated with holding extra inventory.

Greasley’s Method

Andrew Greasley is a U.K.-based lecturer and expert in operations management whose approach to calculating buffer stock levels is similar to Heizer and Render’s method. However, Greasley’s method also considers average demand for an item over a set period of time, in addition to the standard deviation in lead time and Z score (desired service level factor). The formula for this method is:

Buffer stock = σLT (standard deviation of lead time) x Average demand x Z (desired service level factor)

This method is particularly useful when both demand and lead times fluctuate significantly. By incorporating the standard deviation of lead time, it accounts for the unpredictability in supplier delivery schedules. The inclusion of average demand (typical number of units required to meet customer needs over a given period) ensures that the buffer stock calculation is tailored to a specific product’s consumption rate. The service level factor allows companies to adjust their buffer stock levels according to their desired levels of protection against stockouts, with higher Z values resulting in larger buffer stocks but also providing greater assurance against running out of inventory.

Back to our hypothetical electronics retailer and its known variables:

  • Standard deviation of lead time (σLT): 2 days
  • Average daily demand: 20 smartphones
  • Desired service factor (Z): 1.65

Using Greasley’s method, the buffer stock calculation would be figured like so:

Buffer stock = 2 days x 20 smartphones per day x 1.65 = 66 smartphones

Buffer stock = 2 days x 20 smartphones per day x 1.65 = 66 smartphones

Fixed Buffer Stock

Fixed buffer stock is a straightforward approach where a constant amount of extra inventory is maintained as a safety cushion above regular stock levels. This method aims to protect against unexpected fluctuations in demand or supply chain disruptions. Unlike dynamic buffer stock calculations, fixed buffer stock is typically determined using historical data, expert judgment, or a simple rule of thumb, such as keeping 10% more than regular stock on hand. Its simplicity makes it popular among smaller businesses or for managing less-critical inventory items.

Let’s say our electronics retailer uses the fixed buffer stock method for its popular smartphone model. Based on historical sales data and expert judgment, management decides to maintain a fixed buffer stock of 10% above the regular stock level, which is 500 units. The buffer stock equation would be:

Buffer stock = 500 units × 0.10 = 50 units

This shows that the retailer will maintain a fixed buffer stock of 50 smartphones in addition to its regular stock of 500 units.

Historical demand-based buffer inventory

Historical demand-based buffer inventory is an approach to determining appropriate safety stock levels by analyzing past sales and inventory data. This method involves examining historical order patterns, inventory turnover rates and SKU performance across different locations and sales channels to gain insights into actual product demand and sales trends.

By leveraging this historical data, businesses can make informed decisions about how much buffer inventory to maintain for each product. This approach allows companies to tailor their buffer stock levels based on observed patterns of demand fluctuations, seasonality, and supply chain performance. Unlike fixed formulas, historical demand-based buffer inventory calculations can account for real-world variability and help businesses strike a balance between minimizing stockouts and avoiding excess inventory costs.

Stay Ahead of Demand Fluctuations with NetSuite Inventory Management

Managing inventory generally—and buffer stock levels specifically—is a challenge. Attempting to do so without effective technological support would be too much for nearly any company. Inventory management software is specifically designed to digitize and automate these processes, empowering companies to optimize their inventory and make sure they have enough sellable inventory in the right place at the right time.

NetSuite Inventory Management provides a single, real-time view of inventory across all locations and sales channels, allowing businesses to reduce inventory on hand to free up cash while avoiding stockouts. By optimizing inventory levels and helping to ensure product availability across multiple channels, NetSuite Inventory Management helps businesses keep inventory costs low, while exceeding customer expectations.

Effectively managing buffer stock is crucial for businesses looking to navigate the complexities of demand fluctuations and supply chain disruptions. By implementing approaches, such as historical demand-based buffer inventory, Greasley’s method and fixed buffer stock, companies can tailor their inventory strategies to meet customer needs while minimizing costs. Each method offers unique advantages, ranging from the simplicity of fixed buffer stock to the nuanced insights gained from historical data analysis.

Ultimately, leveraging robust inventory management systems helps businesses maintain optimal inventory levels that ensure product availability and enhance customer satisfaction while mitigating the risks associated with excess inventory. By adopting these strategies, companies can safeguard against stockouts and also position themselves for sustainable growth even in ever-changing markets.

Award Winning
Cloud Inventory

Free Product Tour

Buffer Stock FAQs

What is the buffer stock principle?

Buffer stock refers to the additional inventory that a company maintains to safeguard against unexpected increases in demand. This surplus inventory helps ensure that businesses can meet customer needs without experiencing stockouts, allowing for smoother operations and enhanced customer satisfaction during periods of fluctuating demand.

What is an example of a buffer inventory?

An example of buffer inventory is when a toy retailer maintains additional stock of the hottest items heading into the holiday season, beyond what it may expect to sell. This extra inventory helps the retailer manage unexpected spikes in demand, ensuring that they can fulfill customer orders without running out of stock.

What are the benefits of buffer stock?

Benefits of carrying buffer stock include cost stability, supplier discounts, avoidance of product shortages and stockouts, and improved strategic planning.

What is a buffer stock in medical terms?

Buffer stock in medical terms refers to the extra supply of medical supplies, medications, or equipment that healthcare facilities maintain to handle unexpected increases in demand or potential supply chain disruptions. This additional inventory helps hospitals and other medical centers continue to provide necessary care during emergencies, outbreaks, or other unforeseen circumstances without running out of critical resources.

What is a buffer stock in a level business?

A level business refers to a company where the production rate remains constant over a specific period, regardless of fluctuations in demand. This production strategy is often used by manufacturers seeking to maintain a steady workflow and predictable costs. These companies will often maintain some buffer stock to account for demand fluctuations and supply chain disruptions, but at a level that does not unduly increase inventory holding costs given the predictability goal.