What challenge is commonly associated with overstocked inventory?

Overstocked inventory presents a significant challenge primarily due to increased holding costs and markdowns. When a retailer or business has more inventory than it can sell, it incurs various costs that can erode profits. Holding costs include expenses related to storage, insurance, and the opportunity cost of tied-up capital. Additionally, to move excess inventory, businesses often resort to markdowns — price reductions meant to stimulate sales. While markdowns can help clear out inventory, they can also reduce profit margins, resulting in financial strain.

This situation ultimately impacts the overall financial health of a business, highlighting the importance of effective inventory management strategies to ensure that stock levels align with demand.