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 bothoverheads 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.