Final answer:
Firms hold safety stock to handle variations in lead time or daily demand, ensuring they can meet customer demand promptly despite supply chain uncertainties.
Step-by-step explanation:
Firms hold safety stock primarily to compensate for variations in lead time or daily demand. Safety stock functions as a buffer against uncertainties in supply chain operations, safeguarding against potential stockouts that might occur due to fluctuations in customer demand or delays in receiving supplier shipments.
Unlike the other options such as mathematical weaknesses of the Economic Order Quantity model, fluctuations in carrying costs, or uncertainty in the estimation of ordering costs, the variations in lead time and demand directly impact a firm's ability to meet customer demand promptly.
An economic principle closely related to stock management is the concept of economies of scale, where increasing the output volume reduces the cost per unit. Firms like Costco and Walmart are good examples of leveraging economies of scale.