How do demand fluctuations typically affect inventory levels?

Demand fluctuations have a significant impact on inventory levels. When demand for a product increases unexpectedly, businesses may find themselves unable to meet customer needs, leading to stockouts. Conversely, if demand suddenly decreases, companies may overstock items that are not selling, resulting in excess inventory. This variability creates challenges in managing inventory effectively.

To maintain a balance, companies must forecast demand accurately and implement inventory management strategies that account for these fluctuations. This can include techniques such as safety stock, just-in-time inventory, and agile supply chain practices, all designed to mitigate the risks associated with demand changes. Thus, the involvement of demand fluctuations in causing either excess inventory or stockouts directly supports the correctness of the selected answer.