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2/21/2016Collection – MBA675T303 Operations & Logistics in the (...;1/26CollectionUsers can Collect posts into a printable, sortable format. Collections are a good way to organizeposts for quick reading. A Collection must be created to tag posts.More HelpThread:McLendon Q16Post:McLendon Q16Author:Posted Date:January 25, 2016 8:45 PMStatus:Published16. What are the purposes of safety stock? How will the use of safety stock affectthe total annual inventory cost? Illustrate these concepts with an example.According to Krajewski, Malhotra, and Ritzman (2015, p. 323), safety stockinventory is surplus inventory a company holds to protect again shortages dueto fluctuating demands or lead times. The purpose of safety stock is to reducethe risk that a product runs out of stock.A safety stock may need to be kept for varying reasons. One reason is tomitigate customer dissatisfaction. If a customer expects to receive the productimmediately, he will not be pleased if there is a long wait. This could result inlost sales, both short and longterm. For example, a customer seeking an iPhonewill not be satisfied to wait for three weeks for the model he wants at his regularwireless carrier if he can go to other carriers and get the device immediately.Another reason safety stock may be kept is to mitigate for varying demand of aproduct. If a product’s demand is more than the forecast, a safety stock will helpoffset the low forecast, however, a demand that is too high can mean highercarrying costs and excess product. For example, home improvement stores inthe South may choose to increase their inventory of generators as hurricaneseason approaches. Generators can be carried from year to year without majorloss, but in the case a hurricane hits an area, the store will sell out of as manygenerators as they have in stock.A company’s ability to change products nimbly when market landscapes changeis also reduced if it is carrying safety stock. This is evident in the electronicsindustry. If someone carries too much inventory of a television, it may not beable to purchase the next great television upon its release. If safety stockJana McLendon
2/21/2016Collection – MBA675T303 Operations & Logistics in the (...;2/26(Post is Read)dominates its inventory, it may not have the purchase power to compete.When a company carries safety stock, it increases its total cost of inventory. Thecosts of the inventory will be increased by additional produced or stored items,storage and handling costs, and additional taxes, insurance, and shrinkage.