CPIM Practice Exam

Which factor is crucial for determining the safety stock level in an inventory system?

1. Average lead time

2. Demand variability

3. Carrying cost

4. Order quantity

The correct answer is: Demand variability

Determining the safety stock level is fundamentally about managing uncertainty in demand and supply. Demand variability is crucial because it directly affects how much buffer stock is necessary to prevent stockouts. When demand is highly variable, the likelihood of encountering unexpected spikes in order volume increases. In such cases, having a sufficient safety stock ensures that the organization can meet customer demand during these fluctuations, thereby maintaining service levels and preventing lost sales. While average lead time, carrying cost, and order quantity are important factors in inventory management, they do not directly influence the sizing of safety stock as significantly as demand variability does. Average lead time may affect the timing of when to reorder, but it is the uncertainty in demand that dictates how much extra inventory should be kept on hand. Similarly, while carrying costs and order quantity are key considerations for overall inventory management and cost-efficiency, they do not address the need for a buffer against unpredictable demand. Hence, understanding demand variability is central to establishing an effective safety stock level.