There is always variation in demand and supply of product. The protection against such unpredictable variations can be done by means of buffer stocks.
a. Changes in Size and Frequency of Orders : The amount of product sold in large number of orders of small size can be operated with fewer inventories .
b. Unpredictability of Sales : If there are too many fluctuations in demand of product then these can be held only by flexible and large capacity of inventory operations.
c. Physical and Economic Structure of Distribution pattern : Longer the channel of distribution the more is the inventory requirement. Field inventories basically improve service to retailers by removing some of the burden of keeping stocks.
d. Costs Associated with Failure to Meet Demands : When there is heavy penalty on any delay in fulfilment of any order then inventory should be large.
e. Accuracy Frequency and Detail of Demand Forecasts : Fluctuations in stock exist when forecasts are not exact. The responsibility of forecast errors for inventory needs should be clearly recognized.
f. Protection against breakdown or other interruptions in production .