Business Studies – 4.1.1 Production processes | e-Consult

Holding large stock levels presents both advantages and disadvantages for a business. Advantages include the ability to meet unexpected surges in customer demand, preventing lost sales and maintaining customer satisfaction. Economies of scale are achieved through bulk purchasing, leading to lower per-unit costs. This can improve profitability. However, there are significant disadvantages. A major risk is obsolescence, particularly for products with short life cycles or those susceptible to technological changes. Storage costs, including warehousing, insurance, and security, can be substantial and impact profitability. Furthermore, the opportunity cost of capital is high; money tied up in inventory could be invested elsewhere to generate a return. The business also faces the risk of inventory becoming damaged, stolen, or written off. Therefore, businesses must carefully balance the benefits of holding stock with the associated costs and risks.