Management of operations - Overstocking and Understocking

Question 1

What are the consequences of overstocking?

Answer 1

• Suppliers can go out of date if they are stored for too long.
• Supplies can go out of fashion before they are used.
• Too many supplies leaves a risk of theft by staff, customers or thieves.
• The business will have to pay for stockholding costs, such as insurances and security.
• The opportunity costs of money being tied up in inventory which could be better used for elsewhere in the business.

Question 2

What are the consequences of understocking?

Answer 2

• The business may run out of inventory and be unable to continue production or carry on selling.
• The business will not benefit from bulk buying discounts due to making smaller orders.
• There may be no goods to sell, resulting in bad reputation and customers not returning.
• There will be increase in delivery costs since many smaller deliveries will have to be made.
• There will be an increase in administration costs, e.g. paying staff to browse for supplies, complete form orders, settle invoices, etc.