Which type of inventory is held as a cushion to protect against forecast error?

• A. Hedge inventory
• B. Fluctuation inventory
• C. Safety stock
• D. Buffer stock

Answer: (B)

When planning inventory, you keep an extra cushion to cover the uncertainty in demand and supply that can cause forecast errors. That cushion is safety stock. It absorbs the difference between what you expect and what actually occurs, helping you avoid stockouts during lead time and periods of variability. The amount you hold depends on how volatile demand and lead times are and the service level you aim to maintain; more variability or longer lead times require more safety stock. Hedge inventory protects against price or currency risks, not forecast errors. Buffer stock is sometimes used synonymously with safety stock, but the explicit cushion for forecast error is safety stock.