High inventories mean more productive capacity is needed, leading to a greater investment
in equipment and space. Since lead time and high work-in-process inventories
are usually correlated, high inventories may often be the cause of overtime. Overtime,
of course, increases operating expenses and lowers profitability. Lower inventories reduce carrying costs, per-unit investment costs, and other operating expenses such as
overtime and special shipping charges. By lowering investment and operating costs, the
unit margin of each product is increased, providing more flexibility in pricing decisions