The correct answer is: A. Increase Inventory Cost
Safety stock is a level of inventory that a company keeps on hand to protect against unexpected demand or supply disruptions. It is a buffer that helps to ensure that the company can continue to meet customer demand even if there are problems with its supply chain.
The cost of safety stock includes the cost of the inventory itself, as well as the cost of storage and handling. The cost of safety stock can be significant, so companies need to carefully consider how much safety stock they need to keep on hand.
There are a number of factors that companies need to consider when determining the appropriate level of safety stock, including the variability of demand, the lead time for ordering new inventory, and the cost of carrying inventory.
In general, companies will want to keep a higher level of safety stock for products that have high demand variability, long lead times, and high costs of carrying inventory.
Safety stock can help to protect companies from lost sales and customer dissatisfaction. However, it also comes at a cost. Companies need to carefully balance the costs and benefits of safety stock to determine the appropriate level for their business.
Here are some additional details about each option:
- Option A: Increase Inventory Cost. As mentioned above, safety stock is a level of inventory that a company keeps on hand to protect against unexpected demand or supply disruptions. This means that the company will have more inventory on hand than it would otherwise, which will increase its inventory costs.
- Option B: Decrease Inventory Cost. This option is incorrect because safety stock actually increases inventory costs.
- Option C: No effect on Cost. This option is also incorrect because safety stock does have an effect on cost, as explained above.
- Option D: None of the above. This option is incorrect because Option A is the correct answer.