OM in the News: Capacity Slack is Tightening in US Firms

The Wall Street Journal (May 18,2011) just reported that US companies are putting the production capacity they idled during the recession back to work. Some, like DuPont and GM, have reached the point where they need to invest in new plants and equipment and hire new workers. But The Journal warns that the rising use of capacity can make it easier for companies to raise prices (creating inflation) and can lead to production bottlenecks.

The newest reading shows capacity utilization at around 77%, still well below the 81% reached before the recession hit. But it is up from a low of 67% in June ,2009. During the recession, companies held off replacing old equipment, dismantled some plants–and some, of course, went out of business. The result was a 3% drop in US industrial capacity, only the 2nd time a net reduction has been seen since 1948.

The rise in capacity utilization may prompt companies to expand capacity by investing in new equipment, hiring, and adding new shifts, as GM is doing.

Discussion questions:

1.Why is capacity utilization an important factor in business?

2. Which industries are recovering faster than others?