Deployment of Manufacturing Flexibility: An Empirical Analysis of the North American Automotive Industry

Abstract

The ability to manufacture several products on the same production line and switch seamlessly among them allows a firm to both hedge against demand uncertainty and respond to competition. In this paper, we empirically analyze the deployment of manufacturing flexibility in the North American automotive industry. In particular, we track demonstrated ability to manufacture automobiles with different platforms at 75 assembly plants over a period of eight years. We find that, consistent with extant theory, flexible capacity is used to manufacture products with high demand uncertainty and low demand correlation. We find evidence of product life-cycle effects: flexible capacity is used to manufacture models that are early in their life-cycle as well as aging models. Moreover, we find strong evidence that automotive manufacturers use flexibility as a “competitive weapon”; flexibility is deployed in market segments in which there are a larger number of flexible competitors. However, this use of flexibility as a competitive weapon may not be optimal, as suggested by lower plant productivity.