How do you size safety stock, and what causes the bullwhip effect?

Short answer

Safety stock is the inventory you hold to buy a chosen service level against forecast error over the replenishment lead time, so it scales with the variability of demand and of lead time; the bullwhip arises because each tier reorders from its own buffered demand rather than the real one.

Keep demand forecasting explicit in the answer because that is the concept the interviewer is actually trying to test. A good demand forecasting explanation names the trade-off, the failure mode, and the evidence you would use before choosing. Use demand forecasting once more at the decision point so the answer reads as judgement rather than a detached example.

Keep demand forecasting explicit in the answer because that is the concept the interviewer is actually trying to test. A good demand forecasting explanation names the trade-off, the failure mode, and the evidence you would use before choosing.