What is safety stock and why is it used?

• A. To reduce total costs
• B. To increase flexibility
• C. To monitor supplier performance
• D. To protect against demand variability and supply disruption to maintain service levels

Answer: (D)

Safety stock is extra inventory kept beyond what is expected to cover uncertainty in demand and supply. Its main purpose is to protect against fluctuations in customer demand and possible delays or disruptions in replenishment, so you can keep service levels high and avoid stockouts. By having this cushion, you can still meet customer needs even when demand is higher than forecast or when lead times lengthen. In practice, managers set safety stock based on how variable demand and lead times are and the desired level of service, knowing that more safety stock raises holding costs but reduces the risk of losing sales. The other options miss the point: safety stock isn’t primarily about reducing total costs, and while it can indirectly affect flexibility, its central role is buffering against uncertainty; it also isn’t a tool for monitoring supplier performance.