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What primarily determines the level of safety stock?

  1. Variability of demand

  2. Inventory carrying cost

  3. Ordering cost

  4. Risk of obsolescence

The correct answer is: Variability of demand

The primary determinant of safety stock is the variability of demand. Safety stock serves as a buffer against unpredictability in customer demand and is crucial for ensuring that service levels are maintained even when there are fluctuations in how much product is required. When demand is highly variable, it becomes essential to hold a larger safety stock to mitigate the risk of stockouts during peak demand periods or unexpected increases in orders. In contrast, if demand is stable and predictable, less safety stock is required since the likelihood of running out of inventory diminishes. While inventory carrying cost, ordering cost, and risk of obsolescence are important factors in inventory management, they do not primarily influence the determination of safety stock. Inventory carrying costs relate to the total expenses of holding inventory, while ordering costs are associated with the procurement of new stock. The risk of obsolescence pertains to the potential for products to lose value or become unsellable due to changes in consumer preferences or technological advancements. These factors play a role in overall inventory strategy but do not dictate the adjustments made to safety stock levels in response to demand variability.