Overstocking
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 could be invested elsewhere in a business.
- Inventory can go out of fashion or spoil 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.
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.