What is Buffer Stock?

Buffer stock is an excess amount of raw materials kept on hand to guard against any unplanned inventory shortages leading into the production process. The amount of buffer stock to retain involves balancing the cost of the extra inventory against the amount of production downtime that is avoided by having the extra inventory.

The concept also refers to the practice by governments of buying excess commodities during periods when there is an excess supply and selling them when the supply level is unusually low. Doing so keeps commodity prices from going too low (during periods of high supply) or too high (during periods of low supply). The underlying theory is that this practice results in more stable pricing conditions for producers. The concept can be applied to many products, including oil, corn, and butter.

Disadvantages of Buffer Stock

There are several disadvantages associated with the use of buffer stock, which are as follows:

Inactive asset. When an organization acquires large amounts of buffer stock, this can represent a large investment in a “dead” asset that cannot be actively used to generate a return. In essence, the business is investing in an inventory asset that is generating no return.
Risk of obsolescence. There is a risk that buffer stock will become obsolete, resulting in a large write-off.
Additional storage costs. There are a number of storage costs associated with buffer stock, including the depreciation on storage space, warehouse staff time, and inventory insurance.
Lazy scheduling. When you have a large amount of buffer stock, this can hide a weak scheduling function. When the production planning team is closing monitoring inventory levels, it can schedule production without having to hide its flaws behind a large pile of inventory.

Consequently, it is necessary to judge what the ideal amount of buffer stock might be, and not exceed it.