Question

Discuss the reason why companies are trying to reduce their inventory level.

Answer 1

The reasons due to which high inventory levels are not preferred are given below:

1. Reduce Material Maintenance and cost - When the inventory is high, the space required to hold it is increased and hence we have to pay for space and resources to hold that inventory. Labour and transportation fees to move that stock around is also required which costs even more. Reduced inventory means that we have allocated less moneytowards workers to handle the excess inventory. Hence, lowered inventory is helpful.

2. Flexibility - This is the era of constant technological advancements and hence shorter product life cycles. Hence, if we order too much stock, it may become obsolete in next six months and will leave us with filled storage space and more costs. Hence, low inventory is required.

3. Reduced Waste - When we order too much inventory, it will sit in the warehouse and we may lose profits on other products due to filled warehouse space. Also, we will be forced to find ways to get tid of that excess inventory. If we are working with perishable goods, they will go to waste if not used early. Hence, to reduce costs and wastes, we need to reduce the inventory levels.