Question

Explain the risks and benefits associated with holding inventory

Answer 1

Risk associated with holding inventory;

Followings are the main risk associated with holding inventory;

1. Blockage of cash;

As we know that purcahse of inventory requires cash, so holding more and more inventory means blockage of more and more cash. In other words we can say that holding more inventory will lead to blockage of cash funds unnecessarily.

2. Risk of obsolescence;

Market is dynamic in nature and demands of the customers changes time to time. So if a firm holds excess inventory at any time then there will be a higher risk of obsolescence of the stock.

3. Risk of low sale volume;

If a firm have low sales volume then holding higher inventory will lead to risk of low sales volume.

4. Higher storage costs;

Inventory always requires proper storage facility and such storage facility need funds hence higher inventory will lead to higher storage costs.

5. Risk of natural disaster;

Sometime we see that natural disaster cause to loss of inventory hence holding higher inventory will lead to risk of natural disaster.

6. Higher expenses required for insurance;

In modern time most of the firms & companies required to insured its’ inventory. Thus holding higher inventory will lead to higher insurance expenses.

7. Risk of decline in the stock prices;

Price of goods & services are dynamic in the market. Thus if a firm holds higher inventory then there may be risk of decline in the prices.

Benefits associated with holding inventory;

Followings are the main benefits associated with holding inventory;

1. Quick reponse to the demand;

If a firm having sufficient inventory then that firm may meet demands quickly as it occures in the market.

2. Low risk of shortage of stock;

If a firm having sufficient inventory then firm can maintain it stock in case of low production possibilities. In other words we can say that holding sufficient inventory will help in catering the condition of shortage of stock.

3. Meeting the available opportunites in the market;

If a firm have sufficient inventory then it can take advantage of available opportunites in the market. A firm can meet out large order at reasonable prices also.

4. Firm can get proper discount from suppliers;

In case of purchase of higher inventory a firm can take trade discount from suppliers.

5. Reduction in the ordering cost;

If a firm purchase inventory regularily then there will be higher ordering costs for the firm. So having higher inventory firm does not need to suffer with higher ordering costs. In other words we can say that holding proper inventory will result into lower ordering costs.