Buffer Stock Being Embraced by More Companies, Survey Shows

New data from the Hackett Group’s Working Capital Survey indicates that the global supply chain this year, facing inconsistent lead times and shipping delays, has made some drastic strategic changes toward the use of buffer stock.

In a survey of 1,000 nonfinancial companies’ working capital levels, inventory balances increased from $1.19 trillion a year ago to $1.44. According to The Hackett Group, there are a few reasons for this, including price inflation. The primary reason, however, has to do with companies’ increased desire to shore up critical inventory to avoid extended lead times, supply chain shortages, and other unexpected challenges that have been seen through the COVID-19 pandemic such as stringent labor protocols.

“Many, many companies are struggling to find the right balance in terms of inventory performance,” said Shawn Townsend, a director at The Hackett Group, “What is the right inventory level, what is the right inventory mix, versus what is the demand going to be in the next few months? That’s a very hard question to answer.”

This sentiment was echoed in the survey by John Krier, CEO of medical device company Dynatronics. “Although lead times are getting more consistent, said CEO John Krier, “we’re still having to carry much more safety stock or plan for longer lead times due to the environment that’s out there. … It’s hard to tell exactly what [the company’s steady-state] inventory level will be, along with our growth. … We’re having to modulate what is that inventory level we need to support that [double-digit] growth.”

This transition toward increased buffer stock of critical inventory is not just a flash in the pan; rather, it is an indicator of a larger evolution of the current global supply chain. According to a separate survey from Protiviti of 1,064 CFOs, vice presidents, directors, and finance managers, 45% said their company was planning to move away from a just-in-time supply chain model toward a revenue insurance model that prioritizes flexibility and resilience over low costs and efficiency.

“In most of my CFO conversations, they’re very concerned with the lack of ability and transparency in delivering revenue and its long-term effects on shareholder valuation,” said David Petrucci, a managing director and leader of Protiviti’s supply chain and operations practice. He added: “Board members [I speak to] are asking many questions about what should be the board’s responsibility in the future related to governance and oversight from a more detailed supply chain and operations viewpoint … putting pressure on the CFO’s office to better evaluate the overall supply chain risk level and to make the proper investments to prevent the disruptions of the last three years.”

The use of buffer stock, certainly, reflects this desire for more secure, long-term investments insulated for disruption.