What is the effect of high service levels on inventory management?

High service levels refer to the ability of a company to fulfill customer demands without delays, thereby ensuring customer satisfaction. To achieve these elevated service levels, businesses often hold more inventory to meet uncertain demand. This strategy inherently leads to increased holding costs, as more inventory requires more storage space, greater insurance coverage, and potentially higher costs associated with deterioration, obsolescence, and theft.

By maintaining a larger stock on hand, a company can mitigate the risk of stockouts, providing assurance that products are available when customers need them. This proactive approach, while enhancing service levels, primarily impacts the financial obligations of the business, resulting in significantly higher holding costs associated with the additional inventory. Other options might suggest benefits or changes as a result of high service levels, but they do not directly address the immediate financial implications, making the increase in holding costs the most pertinent effect of high service levels on inventory management.