REASONS AGAINST HOLDING INVENTORIES:
- Increased carrying cost – interests on capital tied in stocks, warehouse rent (space), taxes, materials handling and insurance as well as management requirements.
- Decreased customer responsiveness – inventories obstruct production systems and the ability to respond to change is diminished e.g. changes in technology requiring different stocks. This can lead to a negative response to customers.
- Increased production coordination – more management time is needed to manage and coordinate large inventories. This can lead to managers overlooking other core activities.
- Reduced return on investment – inventories increase assets of the company. Much capital is tied up in the stocks hence reducing productivity of the firm.
- Overproduction – large lots of stocks cause overproduction, which may result in obsolete production. Stocks also tend to be misused if they are plenty with loose control over them.
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