The costs of overstocking and understocking have a direct impact on both the optimal cycle service level and profitability.

Question

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Overstocking can lead to higher holding costs, potential obsolescence, and increased risk of product damage or loss. Understocking can result in lost sales, backorders, and dissatisfied customers. Both of these scenarios can affect the optimal cycle service level, which is the level of inventory necessary to provide a desired level of customer service. Furthermore, if the inventory levels are not optimized, it can impact profitability as excess inventory ties up working capital and understocking may result in lost sales or costly expedited shipping.

The Costs of Overstocking and Understocking Have a Direct Impact