In inventory management, safety stock is sometimes referred to as buffer stock. Buffer stock is a critical piece of inventory management that keeps operations running smoothly while ensuring customer satisfaction remains high.
In this article, we will zero in on buffer stock, not only defining the term but helping you learn how to calculate it quickly using data you already have at your fingertips. We will also touch on the factors that can affect your buffer stock needs, including fluctuations in lead time, customer demand, and cash flow.
What is buffer stock?
Buffer stock (or safety stock) is the inventory a business keeps on hand that exceeds its regular operational needs. Buffer stock is meant to prevent stockouts that affect a business’s everyday operations.
It is important to note that buffer stock is not the same as anticipation inventory, which is inventory a business may stockpile because it has reason to believe a significant change in customer demand is coming soon. Instead, buffer stock simply aims to ensure a business can continue operations despite the usual and anticipated wait times incurred after reordering product.
Typically, buffer stock is calculated based on supplier lead time. It is often used alongside other essential inventory management formulas like reorder point and economic order quality to ensure businesses are ordering inventory as efficiently as possible while minimizing risks and unnecessary carrying costs.
Maintaining buffer stock is essential for most businesses, even those that practice airtight inventory control. Since inventory control aims to reduce the costs of carrying excess inventory while ensuring customer demand is met swiftly, buffer stock is crucial in helping companies fulfill their inventory control goals.
After all, shortages and stockouts turn happy customers into unsatisfied ones who may search out new vendors from which to buy goods and services.
Related: Inventory Reordering Best Practices
Calculating buffer stock
The formula for buffer stock is the same as for safety stock:
(Maximum daily usage x Maximum lead time) – (Average daily usage x Average lead time)
To calculate buffer stock, you’ll first need to solve for the following numbers:
- Maximum daily usage
- Average daily usage
- Maximum lead time
- Average lead time
Maximum daily usage is the maximum amount of a product your business uses daily. Average, on the other hand, is what you tend to use.
Maximum lead time is the utmost amount of time it may take a vendor to get inventory to you. You can solve for this maximum lead time by adding together supply delay and reordering delay.
Reorder delay refers to any waiting time your business incurs when you place an order. For example, if you place orders on a Monday but your supplier only processes them on Thursdays, that’s a three-day reordering delay. Supply delay is how long until your order arrives on location once it’s been processed and accepted by the provider. So, if that vendor accepts orders only on Thursdays and delivers them only on Fridays, that’s a one-day supply delay.
Add the reorder and supply delays together, and the average lead time is four days. However, the maximum lead time would be longer since if you ordered on a Friday, you’d have to wait until the following Thursday for your order to be processed. That would be a seven-day maximum reorder delay and an eight-day lead time.
One thing to note: occasionally, some businesses use the terms safety stock and buffer stock to refer to different things. If this is the case, buffer stock may refer specifically to inventory set aside for increases in customer demand that may stem from a promotion or other spike in demand. In contrast, safety stock refers to built-in wiggle room calculated around standard vendor lead times and regular demand.
If you’re hoping to calculate buffer stock based on an increase in temporary demand, you’ll need to account for that estimated jolt during your calculations.
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Buffer stock calculation example
Say a factory uses an average of 1,000 plastic boxes daily, with a maximum usage of 1,500 boxes daily. They also have the same lead time, reorder, and supply delays referenced above.
To calculate buffer stock for this factory, we’d set:
- Maximum daily usage @ 1,500 boxes
- Average daily usage @ 1,000 boxes
- Maximum lead time @ eight days
- Average lead time @ four days
(Maximum daily sales x Maximum lead time) – (Average daily usage x Average lead time)
(1,500 x 8) – (1,000 x 4) = 8,000 plastic boxes
Properly managing buffer stock
The benefit of buffer stock is that it protects your business from shortages and stockouts that turn off customers, lead to operational delays, or even force operations at your company to cease temporarily. Another possibility is that, with no wholesale inventory to use, your business may purchase inventory locally at retail prices that chip into your company’s profits.
On the other hand, it’s essential to order buffer stock carefully, especially if the inventory you order is at risk of obsolescence or your business has limited cash flow. Over-purchasing buffer inventory can impede your company’s ability to inject cash into other critical components of the business. What’s more, if your inventory expires or loses value—or demand for it suddenly decreases—you could be forced to sell it for far less than it was originally worth.
To practice consistent inventory control and understand how much buffer stock your business truly needs, your company will need to have a complete and thorough understanding of how it uses inventory and how quickly it needs to reorder it. Inventory management software can make it much easier to understand past inventory usage patterns and forecast inventory demand for the future.
About Sortly
Sortly is an inventory management solution that helps you track, manage, and organize your inventory—from any device, in any location. We’re an easy-to-use inventory software that’s perfect for small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.
With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your business. That’s why over 15,000 businesses globally trust us as their inventory management solution.
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