Abstract
We illustrate competitive manufacturing with an original theoretical model of manufacturers and buyers of cars over a business cycle that have peak and off-peak demand periods. There are two types of plants manufacturing cars, plantK and plantL, each having linear total costs with absolute capacity limits. PlantK operates with low VC and high FC by being capital intensive. PlantK is output-rates rigid since it produces throughout the business cycle and always at capacity. PlantL operates with low FC and high VC by relying on outsourcing major components and parts. PlantL is output-rates flexible since it produces only in the peak-demand periods. We show results under SRMC pricing. Then we examine an alternate arrangement which increases demand irregularity. We show, under conditions of the model, that the added cost to supply irregular demand should be small because of the low FC of plantL. We show, under the conditions of the model, that the added gain in consumer surplus to have irregular demand supplied should be large because consumers will have more available for the peak periods. The main policy implication of this theoretical model—for regularly recurring cycles—is to urge focus, even in the off-peak periods, on adequate capacity for the peak periods.
Highlights
Clark (1884-1963) wrote of the desirability of manufacturing plants to operate at their normal capacity with production costs per unit output the lowest
Aranoff cycle to the dominant role of fixed costs that are incurred irrespective of output rates: “It is needless to point out that overhead costs play a fundamental part in the behavior of business at every stage of that many-sided phenomenon, the business cycle
The part they play is most paradoxical. For they make regular operation peculiarly desirable and peculiarly profitable, so that business feels a definite loss whenever output falls below normal capacity, yet it is largely due to this very fact of large fixed capital that business breads these calamities for itself, out of the laws of its own being
Summary
In traditional manufacturing the focus is on the production phase of a product. A successful manufacturing industry goes beyond production, it means thriving research and development (R&D), design, supply management, sales and marketing as well as after sales services. Successful manufacturers do not need to rely on production alone and they can accommodate effective outsourcing.”. Are increasing product flexibility, meaning which products they make. Clark’s writings, the industry is composed of manufacturers that produce a particular product, such as a car. In high-value manufacturing firms are part of other industries depending on what products they sell. In traditional manufacturing, outsourcing increases a firm’s output-rate flexibility of production of a particular product
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