CPIM Practice Exam

Under what condition is safety stock most important?

1. When demand is stable

2. When demand is highly variable

3. When carrying costs are low

4. When ordering costs are high

The correct answer is: When demand is highly variable

Safety stock serves as a buffer against uncertainty in supply chain operations, and it becomes particularly critical when demand is highly variable. In situations where demand fluctuates significantly, there is a higher risk of stockouts, which can disrupt service levels and customer satisfaction. The purpose of safety stock is to absorb unexpected increases in demand or delays in supply. When demand is unpredictable, the likelihood of ordering too little at any given time rises, making a sufficient safety stock essential to maintain the desired service level. This ensures that even if actual demand exceeds forecasts, there is enough inventory available to meet customer needs without causing fulfillment delays. In contrast, when demand is stable, the need for safety stock diminishes because the supply can be aligned more closely with predictable purchasing patterns. Low carrying costs and high ordering costs may affect inventory management strategies but are not direct indicators of the necessity for safety stock in response to demand variability. Therefore, the condition that makes safety stock most important is indeed when demand is highly variable.