Buffer stock

1. Deciding how much buffer stock to hold is a balance, because holding stock costs money and running out of stock also costs money.
2. A large buffer buys security, and the business pays for that security every week the stock sits there unsold.
3. A small buffer cuts those costs, but brings its own bill in extra deliveries and a higher chance of turning a customer away.

The cost of holding buffer stock

1. Cash is tied up. Stock has already been paid for but has not yet been sold, so that money cannot be used for wages, marketing or new equipment until it shifts.
2. Storage space costs rent. A warehouse or stockroom has to be rented, lit, heated and in some cases refrigerated, and none of that space is earning anything while it holds spare stock.
3. Insurance rises. The more stock is on site, the more there is to insure against fire, flood and theft, so the premium goes up.
4. Security has to be paid for. Alarms, cameras, locked cages and sometimes night staff are needed, particularly where the stock is small, valuable and easy to carry.
5. Stock goes out of date or gets damaged. Food passes its use-by date, and boxes get crushed, dropped or forgotten at the back of a shelf, so the business throws away goods it has paid for.
6. Stock becomes unfashionable. Clothing, phones and toys lose their appeal while they sit in storage, so they can only be cleared at a heavily reduced price.

The benefit of having spare stock

1. Unexpected demand can be met. When a product suddenly becomes popular, the stock is already on the shelf, so the business takes the extra sales rather than watching them go elsewhere.
2. No sales are lost to a stock-out. A customer who finds an empty shelf usually buys from a rival, and may not come back, so the loss is bigger than one missed sale.
3. Production keeps running. If a supplier is late, the factory works from the buffer instead of standing idle while still paying wages, rent and interest.
4. Large orders earn a discount. Buying in bulk brings a lower price per unit, which is a purchasing economy of scale, and it also means fewer deliveries to organise.

The cost of holding less stock

1. More frequent deliveries: ordering little and often means more delivery charges, more paperwork, and more staff time spent booking in and checking each drop.
2. Lost purchasing economies of scale: small orders do not qualify for the bulk price, so the business pays more for every unit it buys.
3. There is also a higher risk of running out altogether, which is why the saving on holding costs is never the whole picture.

Balancing the two

1. The right stock level is the one where the cost of holding stock and the cost of running out are both as small as they can be together.
2. A perishable or fast-changing product pushes a business towards a small buffer, because the stock loses its value in days or weeks.
3. Unpredictable demand or a distant, unreliable supplier pushes it the other way, because the cost of an empty shelf is then far higher than the cost of storage.
4. Greggs keeps very little sandwich filling in reserve because it would spoil, while a plumbing merchant holds pipes and fittings for months because they do not.