The Pros and Cons of Keeping Buffer Stock in Retail

As COVID-19 continues on and both the Delta and Omicron variants bring more uncertainty, companies are turning to a buffer stock strategy to mitigate the potential downsides of variability. By keeping excess inventory on hand, organizations hope to maintain steady operations amidst unforeseen demand surges.

While buffer stock can certainly accomplish this goal, there are some ways the inventory management strategy falls short. Today, disruption is no longer an “if”; it's now more of a “when.” As a result, we need more than what buffer stock offers to build more resilient, agile supply chains over the long term.

Buffer Stock Defined

Buffer stock is extra, finished inventory that sellers keep in case of unanticipated variability on the customer side of the supply chain. In other words, buffer stock is what organizations use to fulfill orders when demand rises above their most optimistic projections. In retail, buffer stock could include anything from clothing and home goods to consumer electronics and cookware.

When is Keeping Buffer Stock Effective?

The buffer stock approach isn’t a panacea for all variability on the consumer side of the supply chain. It’s best implemented by retailers that sell high quantities of commodity products. The reason is that it can be costly to make and keep made-to-order goods in excess that are less likely to experience rapid increases in demand.

Buffering can make a lot of sense for retailers that need to protect their reputation, ensure business continuity, and avoid out-of-stock situations. The strategy is undoubtedly an effective way to increase adaptability and resilience, at least temporarily.

Buffer stock likely isn’t the best answer for those retailers that deal in low-volume, high-margin goods. These companies can end up holding expensive inventory for long periods of time. And depending on how long variable conditions last, it’s possible for organizations to end up paying large sums to store or discard unsellable, unusable or obsolete goods.

Will We See Buffer Stock in 2022?

Many retail executives are asking if buffer stock will persist into 2022. In short, the answer is yes. Many retailers will likely have to come up with solutions to manage buffer stock after the rush of the holidays. The real matter to discuss, however, is whether buffer stock should continue to be a go-to solution for handling demand variability.

Many retailers don’t have the capacity to explore alternative solutions. Meanwhile, the temporary fixes companies have implemented, including taking a buffer stock approach, are precisely that — temporary. They won’t work well forever.

Put another way, we need better answers when it comes to finding success in today’s ever-evolving, interconnected global marketplace. Even when we reach the other side of the pandemic, other challenges will still plague modern supply chains. Climate change, in particular, will continue to be a cause of massive disruption going forward.

Consequently, retailers need to make bigger and bolder investments in their supply chain capabilities, especially with respect to digital transformation. Through digitization, companies can augment their workforces, enhance crucial supply chain workflows, and enable collaboration across the entire supply chain. With the right technology, retailers can gain real-time visibility into their inventory and make better, faster decisions around how to meet market demand with all its ups and downs.

Retail executives who can successfully implement short-term stopgaps (i.e., buffer stock) in tandem with long-term solutions will be better positioned in 2022 and beyond to handle disruption when it surfaces. Rather than hold fast to buffer stock, treat it as a means to a greater end — one that's much more agile and resilient.

Bryan Palma is senior manager of industry and solutions at Kinaxis, a supply chain management and sales and operation planning software company.