Definition: Safety stock, also referred to as buffer stock, is the excess inventory that a company carries to make sure they don’t run out of stock on something. You can think of this like just in case inventory. It’s extra merchandise stored just in case they run out of the items on the shelves.
What Does Safety Stock Mean?
What is the definition of safety stock? Since the advent of Just-in-time inventory systems many companies have been ordering small amounts of inventory on a regular basis. The concept of just-in-time inventory is that companies can get rid of all storage facilities and only order enough inventory for the day or week. Inventory is delivered sometimes as often as a few times a day.
Many companies can’t use the just-in-time inventory system because suppliers aren’t close enough or the inventory is difficult to ship. These companies use a safety inventory system. In this inventory system, companies buy more inventories than they anticipate selling. The excess inventory is called their safety stock. This ensures that the company won’t run out of their inventory during a busy season. In other words, companies over stock inventory, so they won’t run out of popular products.
Buffer stock is a good idea for customers’ satisfaction, but it is dangerous for business cash flow. Customers are always happy because stores never run out of popular products.
Let’s take a look at an example.
Example
The companies have to be careful not to buy too much inventory, however. Think about a clothing store for example. If they buy too many winter jackets, they won’t be able to sell them all. The winter jackets will sit in storage for a year until next winter.
All of that money that was spent on excess jackets could have gone to pay for operating expenses. A buffer stock inventory system is a double-edged sword that can be good for business and bad for business health.
Summary Definition
Define Safety Stock: Safety stock means extra inventory management keeps beyond what customers demand in case to prevent shortages.
