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

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  • George J. Hall

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.

Suggested Citation

  • George J. Hall, 1996. "Non-convex costs and capital utilization: a study of production and inventories at automobile assembly plants," Working Paper Series, Macroeconomic Issues WP-96-25, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhma:wp-96-25
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    References listed on IDEAS

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    Cited by:

    1. Ward Brown, 2000. "Financing Constraints and Inventories," FMG Discussion Papers dp367, Financial Markets Group.
    2. Šustek, Roman, 2011. "Plant-level nonconvex output adjustment and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 400-414.
    3. Sustek, Roman, 2009. "Nonconvex Margins of Output Adjustment and Aggregate Fluctuations," MPRA Paper 17486, University Library of Munich, Germany.

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