Question

1. Discuss one major benefit and one major drawback of those assumptions.
2. What does penalty cost mean in the context of inventory management?
3. Explain the concept of “loss of goodwill” in the context of inventory management.

Answer 1

Inventory Management & Costs
Inventory management is the concept of managing inventories which is the stock of materials or finished goods to meet the unexpected fluctuations in the demand from the consumer side. Carrying excess inventory leads the supplier to incur high cost and in the other side a shortage in the inventory may leads to a penalty cost due to lost in the sales. Thus the penalty cost refers to the lost in the sales due to the shortage of goods. Disadvantage of the penalty cost is the lost in sales and the advantage is if the lost from sales is lesser than that of the cost incurred to store the product. If the level of demand can be anticipated almost, a manager can decide to store or not to store a product.
Goodwill cost refers to the cost that incurred by a company or the investment which is rolled back after a customer face a shortage in any of the product, reducing the effects made to attain or establish goodwill in the market. This will reduce the effects of cost made on establishing the company and about the future expectations of the stock of the products and even other products. Perception created through this can reduce the future sales of different products and the demand made.