Non-Convex Costs and Capital Utilization: A Study of Production Scheduling at Automobile Assembly Plants

George Hall

No 1169, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper studies how managers at automobile assembly plants organize production across time. Detailed data from eleven single-source automobile assembly plants display considerable cross-plant heterogeneity. At plants which make low- and medium-selling vehicles the capital stock often sits idle, production is more variable than sales, and week-long shutdowns are often used to vary output. In contrast, at plants which make high-selling vehicles, the capital stock rarely sits idle, production is about as variable as sales, and over time -- bit week-long shutdowns -- is most frequently used to vary output. To explain this difference in production scheduling, I formulate and solve a dynamic programming model of a plant manager. The solution to the dynamic program predicts that when sales are low, non-convexities at the plant level induce the manager to bunch production at points of low average cost; thus, the manager uses less than full capital utilization on average and makes production more volatile than sales. When sales are high, the plant operates in a convex region of the cost curve. Hence the manager employs high levels of capital utilization and makes production less volatile than sales.

Pages: 38 pages
Date: 1997-12
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Citations: View citations in EconPapers (5)

Published in Journal of Monetary Economics (June 2000), 45(3): 681-716

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