What is Buffer Stock?
The buffer stock is excess inventory kept on hand in case sellers have to face unexpected inventory shortages. It is also referred to as a safety stock or an extra product that sellers pre-ship to handle sudden hikes in demand. Packed and pre-shipping products in the warehouse are called buffer inventory.
Significance of Buffer Stock in an E-commerce Shipping and Delivery
Buffer stocks help businesses to reduce stockout costs and make order fulfillment more efficient. These are usually used to deal with unexpected demand in record time.
- Demand-risk mitigation: A buffer stock is more commonly used to deal with an unexpected inflow of demand. It allows a seller to reduce the transit time, as additional products are pre-packed and shipped to the warehouse beforehand.
- Stabilizes revenue: Having extra inventory in hand helps businesses to maintain cash flow. It decreases the risk of stockouts and companies can continue selling products to sellers, increasing customer satisfaction.
Prerequisites of Buffer Stock and How It Works
As the inflow of future unexpected demand is purely an assumption, one must forecast the future inflow, which later serves as a requirement for buffer stock and inventory.
The main aim is to increase the accuracy of the prediction. Therefore, a seller is required to compute the probability where the chances of a stock fall are negated, followed by the calculation of lead time.
- Heizer and Render buffer stock calculation formula: Z X 𝜎T.
- Greasley’s Buffer stock formula: 𝜎LT X average demand X Z
Z is the service factor, while 𝜎T underlines the lead time.
Use Case with Buffer Stock
A seller has an order rate of 170 jeans per month from Manila, Philippines. Therefore, sellers would keep 200 units of jeans in a warehouse as a buffer stock to deal with a future inflow of unexpected demand.