Question

The purpose of safety stock is​ to: A. eliminate the possibility of a stockout. B. control the likelihood of a stockout due to variable demand​ and/or lead time. C. eliminate the likelihood of a stockout due to erroneous inventory tally. D. protect the firm from a sudden decrease in demand. E. replace failed units with good ones.

Answer 1

Hello there!

Your question asks what the purpose of a safety stock is.

Answer: B). control the likelihood of a stock out due to variable demand​ and/or lead time.

The reason why answer choice "B). control the likelihood of a stock out due to variable demand​ and/or lead time" is the correct answer because companies have safety stocks to control the chances of having a stock out.

Safety stocks are also known as a "reserve" for a company, in other words, stocks that a company doesn't touch. It's to ensure that companies don't go through a time where there's an increase in demand while there is a "delay" in production.

If a companies stock demand goes up, but then they can't "produce" the amount that is needed to meet the demand, then they will go through "stock out" and have to go through what is called "stock out costs."

Safety stocks are also known as a "rainy-day" stock, due to the fact that safety stocks are used when a company are not having a great day with the "demand" / "value" of their stocks. It's just to "ensure" / "keep the company safe" from a huge stock out.

I hope this helps!

Best regards, MasterInvestor