Factory Physics by Spearman and Hopp describes how three buffers develop when variability exists: Inventory, Time and Capacity. The art of effective materials planning lies in designing the optimum mix of these three buffers and setting policy accordingly. This blog post talks to the buffering options you have in SAP.
First there is the inventory buffer. It's usually called the safety stock. In SAP you can simply set an estimated amount of inventory that you want to keep aside for when you need more than expected. MRP ignores that stock but the Availability Check can use it in times of over consumption. You can estimate and set the amount in the field Safety Stock on MRP2, but you can also use the forecast module to calculate and update it periodically. As the automatic calculation considers past consumption patterns, long or short lead times and the service level you desire, this is a great way to adjust the safety holdings to an ever changing situation. Then there is the dynamic safety stock driven by the Range Of Coverage profile - also maintained on the MRP2 screen. You can customize various coverage profiles and set a minimum, a target and a maximum coverage in days. The system will then calculate the future, average, daily demand and multiply that figure with the target coverage set in the Range of Coverge profile. The result is a dynamic safety stock that goes up and down with how your average, future, daily demand goes up and down. The RoC profile has the added advantage that yu can set a maximum (dynamic) stock level, which keeps your inventory below a celing should your forecast exceed the actual demand.
As for the time buffer you have some options too. Safety Time on MRP2 allows you to move the requirement, for planning purposes, back in time. As an example: if you set 2 days of safety time and you have a requirement to be fulfilled on September 28, MRP will plan to get that stuff on September 26. But the biggest impact on your time buffer has the decision on MTO versus MTS (driven by the strategy group on MRP3 primarily). Simply speaking: if your customers want to pick the product up right away, you have to plan it using a Make To Stock strategy, so that there is product readily available, produced to a forecast (full use of the inventory buffer). However, if your customers accept a lead time (if they don't and it's not economical for you to produce to a forecast then you shouldn't offer that product in the first place or change your business process so that it feasibly supports MTS production), one can employ a Make To Order strategy. Now the question is: "how long of a lead time does the customer accept?" Once you have the answer you can move the Inventory / Order interface (discussed in previous blog posts of mine) to adjust the lead time to the customer. The I/O interface is that point in your value stream where upstream of it you make to stock and downstream of it the customer "pulls" in a Make to Order fashion. The further downstream the I/O interface is, the shorter the time buffer and you set it in the field "Total replenishment Lead Time" in the MRP3 screen, right next to the field "Availability Check" (and that proximity is certainly not a coincidence).
The capacity buffer enables you to counter variability (line down, forecast error, supplier delivery delayed, rush orders etc.) with additional working hours or machine availability. The most effective use of the capacity buffer is given when you do not schedule your production lines to 100% (I have seen many times that lines are scheduled to be utilized 120%). Leaving free available capacity in the schedule, enables MTO orders to drop in and enables a relative short fulfillment of unplanned order quantities.
The best combination of the three buffers also fulfills the demand for a lean and agile supply chain. The MTS part therin provides the lean part in that it reduces waste whereas MTO gives you a lot of agility.