Inventory Management Flashcards
What is understocking?
When an organisation holds an insufficient amount of inventory to be able to carry out production/fulfil orders.
What are the consequences of understocking?
The organisation may be unable to continue with production.
The organisation may be unable to accept an unexpectedorder.
Continually ordering new inventory can increase administration costs.
The organisation is paying for workers who are not being productive.
Missing out on bulk buying discounts as not purchasing in large quantities.
What is overstocking?
When an organisation holds more inventory than it can use/sell.
What are the consequences of overstocking?
Goods may deteriorate before they are used/sold.
Goods could become obsolete (no longer needed by the market).
Higher storage/insurance/security costs.
Money is tied up in the inventory that has been purchased.
Money storage space is required to hold inventory.
Higher chance of theft from the warehouse/store.
Explain the problems with overstocking and understocking (2 each)
The organisation may be unable to continue with production if they are understocked. This means that customer orders may not be fulfilled.
If the organisation is understocked then they will continually need to order new inventory. This means administration and delivery costs will increase.
If the organisation overstocks then they will need more warehouse space, insurance and security. This will lead to an increase in costs and decrease in profits.
If the organisation overstocks then there may be a higher chance of theft from the warehouse/store as there is more stock to look after and manage.
