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Inventory management is a critical component of your organization that you should not take lightly. Having proper inventory management is essential for maintaining your small business profitable. Having enough things in store to meet demand might help you increase sales, but inventory can eat up a lot of room. They can also be lost, stolen, or spoiled based on the goods, so it's critical to maintain track of your inventory effectively. Here are some pointers to help you find the appropriate balance.
Having a cushion in inventory levels helps eCommerce businesses avoid shortages and inefficiencies in the retail fulfillment cycle. One of the advantages of buffer inventory is its capacity to give stability. This is achievable because businesses can handle unanticipated peaks in demand efficiently and decisively. This decreases the danger that a company may pass up opportunities to serve customers who will go elsewhere if their needs are not met immediately.
On the other hand, purchasing too much inventory can swiftly erode profit margins and increase holding expenses. There are numerous methods for determining a reasonable amount of buffer stock. Still, you will need access to historical inventory and order data and additional tools to help you decide the ideal quantity of inventory buffer to order. In this article, we'll go through the benefits and drawbacks of buffer stock, as well as calculating methods and much more.
What is Buffer Inventory? Pros, Cons and How to Calculate
Buffer Inventory, also called buffer cushion, safety inventory, or buffer stock, is among the kinds of lists that a business should have to run correctly. This sort of inventory is by far the most widely employed safeguard against stock shortfalls or sold outs. A corporation keeps this inventory in transit or on hand to guarantee no disruption in production, supply, or lead - times. Any such stock is also known as a strategic stock, a safety stock, or a buffer inventory.
In other terms, buffer inventory is an extra amount of items that businesses maintain on hand for themselves. Buffer stock is supported on hand to safeguard the company, for example, if market demand for items exceeds the company's forecasts when the manufacturing process fails. Also, when a supplier's shipment arrives late, in smaller quantities, or with a large number of goods damaged during transportation.
The amount of buffer inventory you keep can be determined by the product(s) you sell, overall average lead times, historical inventory, and order trends. Customer demands can often be expected, such as running flash discounts or other sorts of planned marketing.
Other times, a company's sales may increase due to a rapid shift in demand or a market scarcity.
Even if you don't expect a surge in orders shortly, having a "buffer" in how much stock you have available to satisfy demand gives you peace of mind because both your distribution network and the market can be surprising.
Related: What's the Difference Between Warehousing and Storage
Advantages of Buffer Inventory
The following are the benefits of keeping a buffer inventory:
• Assist in mitigating changes in demand and supply
• It aids in the prevention of any interruptions in production.
• It also contributes to the company's revenue stability.
• Such a stock also decreases the likelihood of opportunity loss because the company has stock available to accept new orders.
Disadvantages of Buffer Inventory
The following are the drawbacks of keeping buffer inventory:
• First, if the products are fragile or have a limited shelf life, stockpiling could result in losses.
• Creating and managing a buffer inventory can incur high costs.
• Extra inventory necessitates more excellent storage space.
How to Calculate the Size of a Good Buffer Inventory
On the one hand, a decent buffer must be big enough to permit a company to supply its clients utilizing that buffer without being aware of it or experiencing any trouble. The company may have poor delivery networks or unpredictability in consumer needs. However, as long as that company can quickly meet its clients' expectations, even with buffer inventory, it is doing a great job, and those clients will continue to use its services. But on the other hand, a corporation does not want to keep an excessive amount of buffer inventory. If it does, it will cost a lot of money. Money that could be put to better use.
Furthermore, the corporation wastes too much space in stock for the buffer because you must store the things somewhere.
To correctly determine the buffer inventory level, the organization should consider the primary aspects that affect the inventory level. These elements include, for example, predicted market opportunity and its variability; the time it takes for a delivery to arrive and its fluctuation; the intended degree of supplier service; and the level of business service. Today, a corporation can compute the size of a buffer on its own or utilize commercial tools to do so for her.
Related article: How to Calculate Beginning Inventory
Fixed Safety Stock
The corporation enlists the assistance of production planners in this endeavor. These planners do not employ a formula; instead, they determine the buffer stock depending on the maximum daily utilization over time. Until the planner modifies it, the amount of safety stock remains constant.
Time-based Calculation
The buffer stock is estimated based on future predictions in this case. Typically, the stock is determined by the corporation using this process for a set period. Statistical approaches are used in this method to account for both actual and predicted demand.
Formula-based
Many analysts utilize a standard technique to calculate buffer inventory that is generally composed of safety stock that a company will require in a store. This model, however, does not account for seasonal variations in demand.
The calculation is: (maximum daily usage * full lead time) less (average daily usage * average lead time).
Heizer & Render formula
Analysts utilize such a model when there is a high level of uncertainty on the supplier's end. It provides a more accurate picture by using the standard deviation of the lead time distribution. As a result, it delivers a more transparent and precise view of late shipments' lead time and frequency. This model, however, does not compensate for fluctuations in demand.
The formula is Z* 𝜎dLT.
Greasley's formula
Unlike Heizer and Render's method, this formula considers lead time as well as demand changes. This provides an even better indication of the level of safety stock. This calculation, however, does not take into account stock that is already in the manufacturing process.
The formula is: 𝜎LT * Davg * Z
Bottom Line
Buffer stock is excess inventory maintained on hand in a production delay or an unexpected rise in demand. Calculating the appropriate amount of buffer stock to keep on hand helps to keep carrying costs low while ensuring customer orders are fulfilled on time.
Next article: eCommerce Inventory Management Tips & Tricks
