Debunking The Myth That Buffer Stock Solves Supply Chain Risk
by Craig Parker, Chief Operations Officer, Eva-Last
“Prudence is foresight and far-sightedness” – John Ortberg
Buffer stock is NOT the panacea for supply chain risk management it’s claimed to be and may in fact be hiding fundamental strategic threats with far more sinister consequences than just lost sales.
Beyond smoothing out short-term requirments in product availability due to surges in demand, unforeseen production stoppages, global supply chain instability or transport delays, ‘safety stock’ cannot compensate for poor demand forecasting, poor inventory visibility nor ineffective (or knee-jerk) strategic planning. While it may offer a comforting safeguard for an unexpected discrepancy between supply and demand, unexamined, it could lead to management complacency which will silently erode operational efficiency, profitability and even sustainability down the line.
FALSE SENSE OF SECURITY
Large stockholdings create a false sense of security and at best, buys some time to respond to whatever challenge presents itself. It treats the symptom and not the cause.
Under the veneer of stability, it does not identify the root causes or threats such as overdependence on a single supplier or weak supplier performance management, long lead times, poor planning visibility, unreliable logistics and exchange rate fluctuations.
With the shifting geopolitical landscape marked by war, disruptions to trade routes (currently the Strait of Hormuz and the suspension of flights to and from the Middle East) and tariff uncertainty affecting everything from raw material availability, energy costs to IT systems, buffer stock merely smooths out short-term outages without addressing fundamental operational challenges. What’s more, it doesn’t solve factory shutdowns, IT system blackouts, port strikes, political instability or import bans, quality failures or supplier bankruptcy. A large retailer’s recent SAP upgrade led to an unforeseen IT shutdown that completely disrupted the entire value chain, preventing online ordering and delivery of stock from their Distribution Centre, no matter their stockholding.
Buffer Stock Can Increase Supplier Risk
It may seem counterintuitive, but buffer stock can inadvertently increase supplier risk. Big buffers of safety stock merely “kick the proverbial can down the road” shifting the risk of lost sales and customer trust onto excess stockholding that can potentially increase your exposure to product obsolescence, discounting and dead stock.
Aside from the financial implications of tying up working capital, warehousing and insurance costs, shrinkage or product damage and labour costs, excess safety stock can lead to slower inventory turns, delayed response to market changes, higher write-offs and outdated product sitting in the system causing missed innovation cycles. In fast-moving categories, buffer stock is like dragging an anchor.
Safety Stock Merely Shifts The Risk
Safety stock is a short-sighted solution that hasn’t solved the risk, it has merely shifted it. This translates into cashflow pressure, storage constraints, stock expiry and potential price drop exposure due to price fluctuations.
Real risk reduction comes from strategies such as dual or multi-sourcing, a mix of local and imported offerings, strong supplier contracts with service-level agreements, shorter lead times and supplier redundancy. Better demand planning, smarter safety stock on critical SKU’s, and increased visibility on production schedules, ETA’s, and shipment tracking, all maximise customer satisfaction, resulting in improved profitability.
RESILIENCE REDUCES RISK
Resilience, or adaptability, reduces risk, not stock.
What’s really required is improved forecasting accuracy, better demand sensing, dual sourcing and supplier lead time reduction, as well as better contract terms.
At Eva-Last, significant resources are invested in identifying trends, monitoring fast- and slow-moving SKU’s, and introducing new products through accurate demand forecasting. This is achieved through formal demand planning reviews involving sales, supply chain, finance, and product management, supported by advanced demand planning software, and then aligning our production and distribution operations accordingly.
Real-time monitoring through advanced IT systems such as ERP (Enterprise Resource Planning) and Netstock improves visibility and co-ordination between production, sales, and stock volumes, including minimum stock holdings and re-order points. These systems also support our finance teams in effectively managing working capital and cash flow.
Improved inventory visibility allows Eva-Last to monitor stock values, stock days and fill rates, helping optimise alignment between our supply chain, operations, sales, and finance, in real time so we can act quickly when required.
This has allowed us to reduce our stock holding value by 60% and increase our stock turns from 2.3 to 5.2 year-on-year in one of our companies. By identifying and rationalising our slower moving category SKU’s through clearance sales and increasing the safety stock held at the factory and in-country (of high-margin products), to ensure shorter delivery times in the case of unpredicted demand, we’ve been able to downsizeour SKU’s by 20%.
Conclusion
Safety stock is no substitute for strategic planning and visibility to ensure continued customer satisfaction and sales. The ability to pivot in response to sudden changes in market conditions goes far beyond filling orders and mitigating supply chain shortages. Pioneering producers and distributors such as Eva-Last look beyond mere stockholding to optimise their systems into adaptive, responsive tools that best serve the entire value chain. Not doing so has far-reaching consequences for continued profitability and sustainability.
