Understocking and Overstocking

Understocking
Cannot cope with unexpected changes in demand
Production line may have to stop – therefore firm is paying an idle labour force
Cannot meet customers’ orders so they may choose to go elsewhere
Increased administration costs if firm is frequently re-ordering

Overstocking
High costs of storage and maintenance
High insurance costs
Possible need for security measures
Large amount of space needed
Money is tied up in stock which could be used elsewhere
Stock may deteriorate or become obsolete
Safe disposal incurs extra cost

This answer was taken from the 2005 Higher BM paper, so remember to expand!