Safety stock is the additional inventory that a company holds as a buffer to meet unexpected fluctuations in demand or supply. It acts as a cushion to prevent stockouts and ensures that there is enough inventory available to fulfill customer orders.
The purpose of safety stock is to mitigate the risk of uncertainty in demand or supply chains. It accounts for variables such as lead time, variability in demand, and supplier reliability.
By holding safety stock, companies can reduce the risk of lost sales, backorders, and dissatisfied customers.