Overstocking and understocking
Too much stock brings high storage costs
Businesses need to be aware of the disadvantages of having too much inventory.
- Money tied up in inventory can cause cash flow problems - as it may be difficult to convert this stock into cash to pay bills when needed. This money could benefit from being invested elsewhere in the business.
- Inventory can become obsolete or deteriorate meaning the business will have to write it off as a loss.
- Having too much inventory results in higher storage costs in terms of bothA fixed cost such as heating or lighting incurred by a business. and security. Storage of stock can also lead to an increased risk of product loss due to theft.
Having too much inventory is better than having no inventory, as this would prevent any production. Overstocking has the benefit that it allows a business to meet any unexpected orders. But as a rule it makes financial sense for businesses to keep down the amount of stock they hold.
Understocking
Insufficient stock can stop production
Having too little inventory is obviously a potential disaster for any business. Customers expect their orders to be made and delivered as agreed.
- Business cannot fulfil orders on time.
- Production may stop due to the lack of available materials.
- It will never be possible to meet unexpected large orders.
- The business will be viewed as unreliable and its reputation will be damaged.
