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Non-convex costs and capital utilization: A study of production scheduling at automobile assembly plants

  • Hall, George J.

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.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 45 (2000)
Issue (Month): 3 (June)
Pages: 681-716

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Handle: RePEc:eee:moneco:v:45:y:2000:i:3:p:681-716
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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