Safety stock can be defined as inventory held as buffer against mismatch between forecasted and actual consumption or demand, between expected and actual delivery time, and unforeseen emergencies. From a positive standpoint, safety stock can help to potentially reduce stock out situations however is also contributes to the bullwhip effect. Specifically with demand forecast updating using exponential smoothing, ordering of safety stock will create larger swings for suppliers and even move for orders placed to the manufacturer (Lee, p 95). Furthermore, poorly ordered safety stock that becomes excess or obsolete can lead to increased expense or in a worst-case scenario, written-off or scrapped completely.
Stockout cost, also called shortage cost, is defined as the economic consequences of not being able to meet an internal or external demand from the current inventory. Such costs consist of internal costs (delays, labor time wastage, lost production, etc.) and external costs (loss of profit from lost sales, and loss of future profit due to loss of goodwill). One cause of stockout cost can be attributed to