Question

Aside from losing a sale, what additional risks are involved with too little inventory? Please discuss a retailer that seems to believe in this philosophy....."Buy Less Make More".

Answer 1

Inventory is one of the main assets of the organization. Inventory is the total number of finished products or goods used in the production (raw materials) held by the organization for the purpose of the resale. Inventory management refers to the system or process to source, store, and sells of available inventory whether it is raw material or finished goods. Inventory management is the main activity that should be performed effectively and efficiently to have the right level of inventory at the right time and right location. Inventory holding has a huge cost that includes transportation cost, storage cost, depreciation, and shrinkage cost.

Some businesses believe in keeping low inventory that could be an advantage by having fewer costs mentioned here, but there are various risks associated with too little inventory, that we will discuss in the below points,

a. Missing Out of Sales: We cannot forecast the actual demand from customers and due to that we can lose the forecast of the inventory that could be demanded by the customer. We will not be able to sell and service the customer if we don't have sufficient inventory in our store or warehouse. We can also lose an important and loyal customer if we are not able to service him on time.

b. High Shipping Cost: It is one of the other risks of the high shipping cost when we have a policy of keeping low inventory and ordering goods in less time interval. When we have low inventory we will order to the supplier for inventory, and due to the policy of low inventory we need to give order many times to fulfill our business demand and it will increase the shipping cost per order.

c. Missing out the best prices: We can lose the opportunity to source at the lowest rate when we order less inventory as suppliers provide the lowest rate on the bulk order to have volume advantage. Due to this, we will have higher prices for our products and customer can find same product at less rate with other retailers or wholesalers. We will not be able to get the best discounts on our orders.

d. Lose of reputation and loyal customer: We can lose reputation and loyal customers if we are not able to meet the demand of the customer or regular client due to less inventory policy, and this can impact on our future business as well. We will not be able to serve an unexpected demand when the customer wants his order fulfilled at the same time not in future time.