What is Buffer Stock?

Buffer stock is an excess amount of raw materials kept on hand to guard against any unplanned inventory shortages leading into the production process. The amount of buffer stock to retain involves balancing the cost of the extra inventory against the amount of production downtime that is avoided by having the extra inventory.

The concept also refers to the practice by governments of buying excess commodities during periods when there is an excess supply and selling them when the supply level is unusually low. Doing so keeps commodity prices from going too low (during periods of high supply) or too high (during periods of low supply). The underlying theory is that this practice results in more stable pricing conditions for producers. The concept can be applied to many products, including oil, corn, and butter.

Disadvantages of Buffer Stock

When a business or a government acquires large amounts of buffer stock, this can represent a large investment in a “dead” asset that cannot be actively used to generate a return. There is also a risk that the held stock will become obsolete, resulting in a large write-off. Consequently, it is necessary to judge what the ideal amount of buffer stock might be, and not exceed it.