Excess capacity is the amount of capacity that is available beyond the normal or expected demand. Safety stock is the inventory that is held to protect against uncertainties in demand, supply, or lead time. Excess capacity can be a good substitute for safety stock when the cost of excess capacity is less than the cost of an additional unit of safety stock in the same period. This means that the opportunity cost of having idle resources is lower than the carrying cost of holding extra inventory. In this case, excess capacity can be used to produce more units in response to demand fluctuations, rather than relying on safety stock to meet customer orders. References:

•[CPIM Part 1 Learning System, Module 4: Inventory Management, Section 4.2: Inventory Management Policies and Objectives]

•[CPIM Part 2 Learning System, Module 1: Supply Chain Strategy, Section 1.3: Capacity Management]