Think of buffer inventory as a spare tire you keep in your car. If you get a flat, you can keep driving without a breakdown. In business, it protects you against unexpected demand spikes or supply delays.
Formula (simple version):
\$Buffer = Safety\ Stock + \text{Extra for demand variability}\$
Example:
Average daily demand = 100 units
Demand variation (σ) = 20 units
Lead time (LT) = 5 days
Safety stock (Z = 1.65 for 95% confidence):
\$SS = 1.65 \times 20 \times \sqrt{5} \approx 73\$ units
Buffer = 73 units (you keep this on hand as a safety net)
Exam tip: Always remember to include safety stock when calculating the reorder point. Show the safety stock calculation separately.
The reorder point is the inventory level at which you should place a new order to avoid stock‑outs.
Formula:
\$ROP = (Average\ Demand \times Lead\ Time) + Safety\ Stock\$
Example (using the numbers above):
\$ROP = (100 \times 5) + 73 = 573\$ units
If inventory falls to 573 units, you should place an order.
Exam tip: Show the step‑by‑step calculation. Write the formula, plug in the values, and state the final reorder point clearly.
Lead time is the time between placing an order and receiving it. It can include:
Why it matters:
The longer the lead time, the higher the reorder point and the larger the buffer you need.
Exam tip: Clarify whether the lead time is order lead time or production lead time in the question. This can change the calculation.
| Concept | Formula | Example Value |
|---|---|---|
| Buffer Inventory (Safety Stock) | \$SS = Z \times \sigma_d \times \sqrt{LT}\$ | \$SS = 1.65 \times 20 \times \sqrt{5} \approx 73\$ units |
| Reorder Point | \$ROP = (D \times LT) + SS\$ | \$ROP = (100 \times 5) + 73 = 573\$ units |
| Lead Time | Time from order to receipt (days) | 5 days |