Non-convex costs and capital utilization: a study of production and inventories at automobile assembly plants

George Hall

No WP-96-25, Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago

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 weeklong 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 overtime - not weeklong 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 about as volatile than sales.

Keywords: Automobile industry and trade; Capital; Inventories; Production (Economic theory) (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (4)

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