Overstocking and Understocking Flashcards
What are the consequences of overstocking?
Supplies could go out of date if they are stored for too long.
Supplies could 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 insurance and security.
The opportunity cost of money being tied up in inventory which could be better used elsewhere in the business.
What are the consequences of understocking?
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 a bad reputation and customers not returning.
There will be an 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 order forms, settle invoices etc.
