CPIM Practice Exam

What are safety stocks primarily designed to protect against?

1. Excess production levels

2. Fluctuations in demand or supply

3. Long inventory turnover periods

4. Increased setup costs

The correct answer is: Fluctuations in demand or supply

Safety stocks are primarily designed to protect against fluctuations in demand or supply. When the demand for a product can vary due to factors such as seasonal changes, unexpected surges in customer orders, or issues like supply chain disruptions, having a safety stock helps ensure that there is enough inventory on hand. This buffer stock minimizes the risk of stockouts, which can lead to lost sales and dissatisfied customers. In a business context, managing safety stocks is crucial to maintaining service levels while balancing the costs associated with holding excess inventory. This approach allows a company to operate more smoothly even when there are unexpected variances in purchasing behavior or inventory delivery schedules. The other options do not directly relate to the primary function of safety stocks. Excess production levels are generally a result of poor forecasting rather than a protective measure. Long inventory turnover periods are more about the efficiency of inventory management rather than safeguarding against uncertainties. Increased setup costs are tied to production processes and do not relate to the protection that safety stocks provide regarding demand and supply variability.