Capacity Utilization, Congestion and Production Performance: An Empirical Examination

Abstract

Increases in capital expenditures in various industries have triggered companies to make sustained efforts to manage capacity related costs. More research is being devoted to the allocation of capacity related costs and its role in incremental decision-making. To date, however, such research consists mainly in analyses of the relation between capacity utilization and cost, while the relevant empirical evidence is lacking. This study fills in this lacuna by investigating empirically the impact of capacity utilization on production performance and the moderating impact of manufacturing flexibility and manufacturing variability on the performance effect of capacity utilization. Empirical results based on six-month machine-level data from one semiconductor wafer fabrication company indicate that increased capacity utilization not only leads to longer waiting time and longer manufacturing cycle time but also causes decrease in production quality and thus increase in operating costs, with the implication that maximizing the level of capacity utilization is not necessarily optimal for firms. In addition, the empirical results reveal that performance degradation arising from high capacity utilization is greater in a production environment with higher levels of manufacturing variability. But, firms can reduce the impact of capacity utilization on production performance by improving manufacturing flexibility. This study makes the following contributions to extant research. First, it provides initial empirical evidence for congestion cost with the finding that production performance decreases with increase in capacity utilization. Second, its empirical findings relating manufacturing flexibility and manufacturing variability to performance impact of capacity utilization increase our understanding of the behavior of congestion cost.