Discuss the role of safety inventory in the supply chain and the trade-offs involved

Question

What will be an ideal response?

Answer 1

Answer: The primary role of safety inventory is providing product availability for customers when demand and supply are uncertain. The trade-offs that a supply chain manager must consider when planning safety inventory involve product availability and inventory holding costs. On one hand, raising the level of safety inventory increases product availability and thus the margin captured from customer purchases. Raising the level of safety inventory however, increases inventory holding costs. This issue is particularly significant in industries where product life cycles are short and demand is very volatile. Carrying excessive inventory can help counter demand volatility but can really hurt if new products come on the market and demand for the product in inventory dries up. The inventory on hand then becomes worthless.

In today's business environment, firms experience great pressure to improve product availability while increasing product variety through customization. As a result, markets have become increasingly heterogeneous and demand for individual products is very unstable and difficult to forecast. Both the increased variety and the increased pressure for availability push firms to increase the level of safety inventory they hold.

At the same time, product life cycles have shrunk. This increases the risk to firms of carrying too much inventory. Thus, a key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability.