Popularly, buffer stock is a government scheme wherein the Food Corporation of India (FCI) keeps a buffer of food grains to ensure that the food supply is never disrupted in case of natural disasters and prices don't fluctuate much in case of a shortage of food supply in the market.
Manufacturing industries also maintain buffer inventory to ensure that their business is not affected due to transportation delays or any other reason. In this blog, we are going to understand what is buffer stock, its importance, advantages as well as disadvantages.
What Is Buffer Stock?
The term buffer stock refers to the extra stock held in reserve by a government for emergency situations like price fluctuations or natural disasters. The objective of buffer stock is to stabilize the market by ensuring that there is always a minimum level of supply available to meet the demand in case of unexpected situations.
The government and business organizations purchase a surplus amount of a particular crop during the harvesting season and store it as a reserve for emergency situations. In the case of the next harvest, if for any reason the food supply is not sufficient due to harsh weather, pest infestation, or diseases, this surplus crop is used to meet the demand.
As the government keeps a buffer stock of grains, similarly many manufacturing industries keep buffer inventory to deal with unexpected circumstances. For example, industries that depend on seasonal raw materials, maintain stock as a buffer so that production is not disrupted during the off-season.
In this way, buffer stock helps to manage the supply and demand in the market and ensure that there is a steady flow of the product while ensuring price stability.
Examples of Buffer Stock
Here are some buffer stock examples:
- Genesis Wheat Stores: In this, Joseph had stored wheat for at least 7 years, and he was able to distribute wheat from the store during the 7 years when famine had struck the region.
- Ever-Normal Granary: In order to stabilize the supply, China in the first century purchased grains and then distributed the same in the areas where there was a shortage of food supply.
- Eu Cap or Common Agricultural Policy: This policy focused on minimum prices for different food items that promoted the idea of oversupply. Hence, European Union had to buy surplus food. However, over a period of time, it proved to be highly expensive to purchase surplus food every time. Hence the EU had to implement quotas to limit the excess supply. And slowly, agricultural policies were implemented to decide the minimum price.
Importance of Buffer Stock
Buffer stocks are important for several reasons, which are explained as follows:
Price Stability
One of the primary reasons for keeping buffer stock is to ensure that the price remains stable. If there is a fluctuation in the market, and the demand suddenly shoots up, the government or the organizations can easily manage this demand using the buffer stock. Since there is a steady flow of food supply, there is a lesser probability of price fluctuations. Thus, it serves both the consumer as well as the producer.
Supply Security
Every government needs to ensure food security. The Food Corporation of India has been formed for this very reason. With buffer stock, they are able to maintain a steady supply of food. This is especially significant when it comes to food, wherein the shortage of supply can directly impact the health and well-being of individuals.
Market Regulation
It is important to keep a check on the demand and supply. With buffer stocks, the government can keep a tab on the price spike or crashes. For example, by releasing the stock into the market when the supply is going down, the government can prevent the price from shooting up by making the food available at a reasonable price.
Consequently, the buffer stock plays an important role in ensuring price stability, supply security, and regulation of commodities. Hence, buffer stock is important for the government to keep a check on market volatility while ensuring the availability of essential goods.
Overall, it helps in creating a positive impact on the market by ensuring complete stability of pricing and supply of food when there is a shortage.
Difference Between Buffer Stock and Safety Stock
Many a time, people get confused between buffer stock and safety stock, the following tabular representation of the difference between the two will help you.
| Parameters | **Buffer Stock ** | Safety Stock |
|---|---|---|
| Objective | It ensures the availability of food and raw materials in case there is a sudden rise in demand or shortage of supply. | Safety stock is regularly used in businesses in emergencies and against unexpected fluctuations in demand or supply. |
| Size of Inventory | These are usually maintained in higher quantities than safety stock. | These are in smaller quantities since these stock act as a cushion to meet unexpected fluctuations. |
| Cost | These are highly expensive to maintain. | These are less expensive to maintain. |
| Example | It usually includes food reserves or medical supplies that the government maintains. | This includes spare parts stock maintained by the manufacturer to ensure timely repair of the machinery in case there is a failure or malfunction. |
Advantages of Buffer Stock
There are several reasons that make buffer stock important for the government or large institutions. Some of these benefits are highlighted below:
Price Stability
One of the key benefits of buffer stock is that it helps maintain price stability in the market. Since the stock is used by the government to ensure a steady influx of the food supply, there is less of a probability of sudden price fluctuation in the market.
Risk Management
Since there will always be a supply of stock in case of unexpected events like a natural disaster or political instability, buffer stock helps in mitigating risks for the safety of the masses.
Market Regulation
Regulating the price in the market is also important. A sudden shoot-up in value can impact consumers. Hence with the buffer stock, the government can ensure the influx of food and medical supplies, thereby preventing a sudden rise in the price.
Economic Stability
By stabilizing the price and ensuring the availability of the key commodities, buffer stock can help in promoting the economic stability of a nation. This becomes especially significant for developing countries where food supply regulation can be a major challenge.
Therefore, buffer stock plays an important role in ensuring price regulation, maintaining market stability, and reducing the risk of shortage of supply in case of untoward situations or instability.
Disadvantages of Buffer Stock
While there are many positive aspects of buffer stock, we cannot undermine the fact that there are certain downsides of the same. The following segment throws light on this aspect:
Cost-bearing
Maintaining the inventory can be expensive. This can be particularly challenging for developing countries where there are limited resources.
Storage and Maintenance
Buffer stock requires proper storage and maintenance to ensure that the inventory is in good condition. Hence, it adds up to the additional cost of maintenance.
Inefficiency
One of the problems that can emerge is when buffer stock is not managed properly. It can lead to inefficiencies in the market, like overproduction or underutilization of resources. Buffer stock plays a significant role in the market. It is an important tool that the government uses to stabilize the market. In order to use it in a positive direction, its optimal maintenance and management are paramount.
Untoward situations, sudden hikes in demand, shortages of supply, and political instability are some of the significant factors that can impact the demand in the market. With the buffers scheme, the government can easily overcome these hassles and ensure a steady supply of food and other essential commodities when the need arises!
FAQs on Buffer Stock
1. What is the optimum level of buffer stock that should be maintained in a business?
There are several factors that impact the optimum level of buffer stock, it includes the demand for a particular product or service, the lead time for suppliers, the supply chain, and the cost of carrying the inventory.
2. What is a buffer stock scheme?
The buffer stock scheme is a mechanism that is developed to stabilize the price of a commodity and maintain the stock. It is usually implemented by the government and the organization to ensure price stability in the market.
3. What is a buffer stock?
Buffer stock is a reserve kept by the government to ensure that there is no shortage of food during a high-demand situation. When there is a fluctuation in the market or political instability or natural disaster, the demand for certain commodities may shoot up. In such cases, the government uses the buffer stock available to them.
4. What is the objective of a buffer stock?
The objective of buffer stock is to ensure that there is never a shortfall of essential commodities in the market. It acts as a safety net to ensure that a business has enough inventory to meet unexpected fluctuations in demand or supply chain disruptions.
5. What commodities are typically stored in a buffer stock?
Commodities that are typically stored in a buffer stock vary depending on the nature of the requirement and the region. Some of the common buffer commodities include food supplies, medical supplies, and raw materials.
6. Who maintains a buffer stock?
A buffer stock is typically maintained by the company or organization that uses the inventory. The government, big organizations, or private companies usually maintain the buffer stock.
7. What is the buffer stock formula?
The formula for calculating buffer stock is as follows: Buffer stock = (Maximum daily usage x Maximum lead time) - (Average daily usage x Average lead time)
