What are the consequences of over investment & under investment in inventory?
Both over investment and under investment in inventory is undesirable as both have consequences.
Following are the consequences of over investment:
- Unnecessary blockage of funds in inventory
- Excessive storage is required to store the inventory.
- Excessive insurance cost.
- Risk of liquidity: Value of the inventory reduces due to the long holding period as the inventories once purchased are difficult to dispose off at the same value.
Following are the consequences of under investment:
- Under investment in the inventory may cause frequent interruptions in production process.
- Insufficient stock of finished goods may create problems in meeting customers’ demands and they may shift to the competitors.