EFFECTS OF OVERSTOCKING

The opportunity cost of  holding stock is the money that could be used for other purposes. 

Some Proprietors and Business Managers sometimes take pride in the astronomical value of their holding stock, believing that the higher their stock value,the greater the chances of their continuous existence, but this is nothing more than a fallacy! In some businesses or organisations, their holding cost is estimated at one-third of the value of the stored goods per year and this consequently affect the profitability of such entities negatively!

In business management, holding cost is money spent to keep and maintain a stock of goods in storage. Thus, these costs include rent,equipment, insurance, security,labour and other direct costs.However, these stored goods can later become obsolete before they are sold,as in the case of a book publishing company, where a syllabus review would make the stored textbooks to become obsolete, hereby reducing their contribution to revenue while having no effect on their holding cost.

However, Goods that are available for sale are referred to as a firm's Inventory or stock. Thus, keeping a large amount of inventory on hand can obviously be advantageous in that it reduces the chance of running out of a product,but a large inventory can also have several notable disadvantages. Therefore, an essential aspect of managing any business that sells physical goods is determining how many goods to produce and how large of stock of goods to keep on hand for Sale.

Below are the Disadvantages of Overstocking

1. Detorioration and Obsolescene

2. Increase in storage cost

3. Shift in Demand

4. Frequent discounting or markdowns

5. llliquidity

Moreso, it is conventional wisdom that Inventory ought to be managed like cash. This simply means that companies must determine exactly how much Inventory they need and stock just enough.

Conclusively, Managers must determine a stock level that balances the risk of running out of products (stock out) with storage costs and the other negative aspects of holding too much inventory.