Buffer stocks are physical stock kept on hand to protect against unexpected supply and demand changes. It can be difficult to balance waste and deficit, and having too much can increase storage costs or lead to waste. Governments use buffer stock schemes to stabilize prices.
Buffer stocks refer to a quantity of physical stock that a company keeps on hand to protect against unexpected variations in supply and demand. Choosing the right amount of this type of stock can be a difficult balance between waste and deficit. In a broader context, buffer stocks involve governments buying and selling products to try to stabilize prices.
Although a business can estimate the amount of inventory it will need at any given time, this can prove incorrect for both supply and demand reasons. On the supply side, a company may face delays in obtaining raw materials, machinery breakdowns or labor disputes, and may find that the levels of errors and breakages in production are higher than expected. On the demand side, a company may find that a product becomes more popular overall, or that changes among rival sellers mean more customers come to the company.
There are several reasons to keep the buffer stock as low as possible. Having too much can increase storage costs or push the limits of existing storage capacity. With perishable products, overstocking can lead to waste.
Holding reserve stock can provide a useful side effect, as it allows a company to check how accurate its forecasts have been. A company can measure its intermediate inventories either at the end of the year or as an average over time. The higher the level of this stock, the more accurate the company’s original forecasts for stock requirements will be. In turn, the company may feel that it can reduce the amount of buffer stock needed in the future.
A variation of this process, known as a buffer stock scheme, can be used in a market as a whole. In this context, the organization operating the scheme is acting to influence prices rather than as a manufacturer with the aim of making a profit. The scheme consists of buying goods when there is a surplus in the market, and then selling them when there is a shortage. In theory, this process helps maintain prices by avoiding large price drops when there is oversupply, or price increases when there is insufficient supply. Due to the objectives of the process and the large scale on which it must be carried out to be effective, such schemes are generally only carried out by governments that take an interventionist approach to the economy.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
