Management of inventory levels is just as important an aspect of business as any other. Just as scarcity of inventory can lead to several problems in the functioning of the business, excess inventory too, can cause several problems. These problems not only pose a threat to the usual factors within the management of business, but also threaten the company at the very grass root level; it is a problem which increases business costs for the given concern and its branches. Overproduction is always a bane. Another problem that may cost a business is the holding of unproductive equipment.
Not only does the holding of obsolete and unproductive equipment lead to losing out on funds that could be otherwise used for obtaining other beneficial assets, but it also leads the business to incur excessive warehousing and storage cost. Economically speaking, the unit incurs a high level of opportunity cost since it could have utilized the storage space for something productive. Not only this, overproduction or storing finished goods hoping that there will be a spark of demand will lead to wastage of resources since with advent of technology, the present stock will depreciate and decrease substantially in monetary value. Also, to be able to store the stock and keep it in good condition, services such as optimal temperature control etc. will have to be rendered, which will just be an added cost for the business unit or firm. Lack or discontinuity of these services will consequently lead to quality problems such as degradation, natural wear and tear etc, inevitably leading to losses.
With the development of awareness about issues such as excess inventories (problems which are not so glaring in the eye, but certainly have consequences that are harmful for the business’ health), business units and firms are now looking into the better management of excess inventory. Falling short in this area leads to bleeding of the concerned business units as they have to sustain high costs (including opportunity costs).