New research proves that building cars in overutilized plants could have cost U.S. automakers $167 million over seven years. Carlson School Professor Rachna Shah and her co-authors also discovered that auto assembly lines which install a greater variety of options and run at or above maximum capacity have significantly more auto recalls.
Shah and Indiana University Assistant Professor George Ball (former Carlson School PhD student and co-author) collected granular data from North American auto plants and examined it alongside recall trends from the National Highway Traffic Safety Association. Their study sheds light on why auto recalls have tripled in the last decade.
The data show more recalls occur when auto plants work their employees at utilization levels nearing 83 percent. These effects become more severe as utilization approaches 100 percent or more.
“Managers have two mandates: provide more variety to customers and in doing so, use their resources efficiently,” says Shah. “This puts managers in a difficult position. We show that offering more options and maintaining high utilization can have very significant negative impact on recalls.”
The researchers theorize this phenomenon occurs because assembly line installers are more likely to make errors when they frequently switch among the options (transmission types, engine horsepower, stereo models), especially when they’re working faster and longer.
“Managers want their employees to be occupied for more and more of their time—this utilization places a cognitive burden on the employees. It results in errors, which results in future recalls,” says Shah. Specifically, plants producing vehicle models with as few as four customizable options are associated with two extra recalls which costs $46.2 million over a 7-year period. Running a plant on hours exceeding overtime will result in eight additional recalls.
Shah has shared her findings with executives at two multinational automotive companies. She hopes automakers take note that while utilizing their manufacturing plants to produce more output and greater variety may make them more competitive today, it comes at a substantial cost to their bottom line in the future.
Watch Shah further describe her findings:
“Plant Operations and Product Recalls in the Automotive Industry: An Empirical Investigation”
Shah, Rachna; Ball, George; Netessine, Serguei Management Science (Forthcoming)