Machinery breakdown is disruptive and the firm may keep machinery in reserve to substitute
for others if they break down or require servicing. If the firm employs only one
machine at each stage of production this may necessitate holding another in reserve.
However, given some knowledge of the probability of machine breakdown, the firm
should be able to proportionally reduce the number of reserve machines as the number
of machines in use increases. For example, six active machines might still warrant only
one in reserve.
To cater for unforeseen demand firms also hold stock (inventories) of materials and
finished products. However, as with machines held in reserve, it is generally found that
although the necessity to do so increases with the size of the firm, it does so in decreasing
proportion to the increase in output, since positive and negative ‘random changes’ in
consumer demand tend to be ‘smoothed out’ or increasingly ‘balanced’ as the number of