Few numbers capture the attention of managers and
shareholders more than operating profits.
In industries that require significant upfront investments in capacity,
the decisions made regarding the level of such fixed investments,
and the extent to which the capacity is eventually utilized to meet
customer demand, have a substantial impact on corporate profits.
Unfortunately, the choice of compensation and reward systems, as
well as the choice of inventory-costing methods, may induce
managerial decisions that benefit short-term earnings at the expense
of a firm’s long-term health. It may take a substantial external shock,
like a sharp economic slowdown, to motivate firms to make the right
capacity and inventory choices, as the following article illustrates.