When the prime rate went over 20 percent, inventory became a significant cost on the income statement, and suddenly even the most tradition-bound operations manager took notice. The pendulum swung and, in many cases, the objective quickly became slashing inventories of finished goods, work-in-process and supplied components, regardless of the impact on operations.
The prime rate today is 4.75 percent and not likely to go much above that for at least the next year or so. However, most operations managers and all consultants still focus on eliminating inventories! Let’s look at two common approaches and their consequences.