How is buffer inventory determined?

Buffer inventory, also known as safety stock, is a crucial component of inventory management that acts as a safeguard against uncertainties in demand and supply. It ensures that a company can continue to fulfill customer orders even when unexpected fluctuations occur.

The correct method for determining buffer inventory is through the calculation of the reorder level minus the product of average usage and average lead time. This approach takes into consideration two essential factors: the average consumption of inventory (usage) and the time it takes for a new order to arrive (lead time). By calculating average usage multiplied by average lead time, you establish the amount of inventory that would typically be used during the time it takes to get a new stock from suppliers. Therefore, by subtracting this amount from the reorder level, you determine how much additional inventory is required (the buffer) to avoid stockouts.

This calculation is particularly important because it balances the need for having sufficient stock to meet demand against the costs associated with holding excess inventory. It ensures that the company operates efficiently, maintaining service levels while managing inventory costs effectively.

In contrast, the other methods do not adequately account for the variability in demand and lead time, potentially leading to either overstocking or stockouts, which can negatively impact operations and customer satisfaction.