Question

A-level question 31 To what extent is it necessary for all businesses to hold buffer levels of Inventory?

Answer 1

As it is difficult for a firm to determine an exact correct amount inventory at any one time, thus most of the businesses will hold buffer stock. It refers to "safe" amount of stock that should be held to cover unforeseen increase in problems or demand of reordering supplies. The poor inventory control can result to issues associated with overstocking or stock-outs.

When the firm holds too much buffer stock (which means stock held in reserve) or overestimation of the demand level of for its products, then it result to overstocking. It raises the costs for firm as holding stocks are an expense for business for several reasons such as higher insurance costs, requirement for more warehouse spacing, higher security costs obsolete or perish inventory. The stock-out is opposite of an overstock. It arises when a firm runs out of stocks. It can cause potential sales loss or missed orders which can harm the reputation of the firm. Thus it is important for all businesses to hold a correct amount of buffer inventory levels