Supplement 7 – Page 4 – The OM Blog by Heizer, Render, & Munson

OM in the News: Capacity Planning for Harry Potter’s World

Universal Studios Hollywood is putting a price tag on the demand for fun, reports the New York Times (March 21, 2016). The theme park is anticipating huge crowds for the April 7 opening of the Wizarding World of Harry Potter. If you want to be one of the first to experience it, be prepared to pay more than if you want to go, say, on a slow Tuesday in September. Such variable pricing is nothing new to airlines and hotels. They have long charged higher prices on holidays and during popular seasons. Disney, as we noted in our March 1, 2016 blog is also experimenting with yield management.

Under the new Universal pricing policy, tickets bought at the gate remain $95. But visitors who book tickets online for low-demand days — such as a weekday in February before Harry Potter opens — can save up to $20. During weekends and peak demand days during spring break or summer, parkgoers save only $5 by booking online.

Harry Potter has already been wildly successful at Universal’s other parks. After a Harry Potter ride made its U.S. theme park debut at Universal’s Islands of Adventure here in Orlando 6 years ago, attendance jumped 30%. But the initial experience was less than magical. The main attraction, a simulated broom ride, left entire families with motion sickness. At one point, the line to get into Hogsmeade village was 9 hours long. Yes, nine! When my family and I toured the attraction, there were no lines–just a mass of humanity that could not move at all.

Universal seems determined to make this introduction smoother. It chose a quieter time of year for the unveiling (spring instead of summer). Management started letting in small numbers of people in February for “technical rehearsals.” Not only is demand-based pricing designed to prevent overcrowding, but 50% more capacity has been added to the Hollywood Hogsmeade.

Classroom discussion questions:

Describe yield management.
What else can Universal do to improve throughput?

OM in the News: Dealing With Capacity in London’s Subway

The London Infrastructure Plan 2050 predicts demand on the system will rise by 60%

On December 4, 2015, the London Underground served 4,821,000 passengers– a new record for a single day, writes The Guardian (Jan.16, 2016). But you can say this about the British: When they settle on a convention of public order, they stick to it. They wait in line. They leave the last biscuit. And when they take the escalator exiting the Tube, they stand on the right. The left is reserved for people in a hurry. Those who block the way can expect a public humiliation.

But it seemed to one Tube exec, visiting Hong Kong, that passengers on that city’s subway were standing calmly on both sides of the escalator and yet travelling more efficiently and safely as a result. The theory, if counterintuitive, is compelling. It’s all very well keeping one side of the escalator clear for people in a rush, but in stations with long, steep walkways (some have a 75 foot height), only a small proportion are willing to climb. By allowing the option of keeping the left side open for walkers, the Tube effectively halves the capacity of the escalator in question, and creates significantly more crowding below. When you allow for the demands for “personal space” that persists in our society, it means people are largely unwilling to stand with someone directly adjacent to them or on the first step in front or behind. This halves again the theoretical capacity of the escalator.

Getting people to stand on both sides would mean that 31 more passengers (28% more) would get on to the escalator each minute–and the Tube has to extract every last ounce of capacity. But in order to make their plan work, management had to be ingenious – and persuasive. That meant teams standing at the bottom of the escalators with megaphones, asking commuters, as cheerfully as possible, if they would mind standing on both sides. It even meant asking amenable couples to hold hands, thereby blocking walkers. How did the new approach work? An escalator that carried 12,745 customers between 8:30-9:30am in a normal week, carried 16,220 when it was designated standing only!

Classroom discussion questions:

What other approaches could speed the exit lines?
What is the main impediment to the London change?

OM in the News: UPS’s Holiday Capacity Struggles

UPS's "white glove" delivery market is one of the fastest growing areas of e-commerce, in which drivers are required not only to deliver but unpack and install bulky items in customers' homes. — UPS’s “white glove” delivery market is one of the fastest growing areas of e-commerce, in which drivers are required not only to deliver but unpack and install bulky items in customers’ homes.

Capacity decisions, our main topic in Supplement 7, have quality, human resource, and maintenance implications which are evident at shipping companies this holiday season. On-time delivery rates for UPS ground packages last week fell to 91%, from UPS’s usual 97% average, reports The Wall Street Journal (Dec. 11, 2015). The giant firm has been slammed with unexpectedly high volumes, extra pickups and not enough staff and equipment to handle all of the packages. UPS this week assigned managers from corporate headquarters in Atlanta and elsewhere to work at delivery centers to handle the additional packages.

The reason: Online sales surged more than expected over the Thanksgiving holiday weekend and into last week. Consumers spent an estimated $4.45 billion online on Thanksgiving and Black Friday, with Black Friday sales rising 14% from a year ago. UPS and FedEx are trying to a avoid a repeat of 2013, when their systems were so overloaded at the last minute that they couldn’t deliver everything on time. But they also are wary of overdoing it like UPS did last year when it overspent and over-hired commensurate to the volume.

Both years, UPS ran over cost estimates by $200 million. This year it has increased capacity by 6% by modernizing its hubs among other things, and it has planned to keep seasonal hiring to the same levels as last year and bring on extra workers as needed.

Classroom discussion questions:

What tactics are available to help match capacity to demand (see page 302)?
What has UPS done to tackle the problem?

OM in the News: Overcapacity Hits China’s Auto Industry

Workers at SAIC-GM-Wuling Automobile in Qingdao

“For much of the past decade, China’s auto industry seemed to be a perpetual growth machine,” writes BusinessWeek (Nov. 9, 2015). Annual vehicle sales surged to 23 million units in 2014 from 5 million in 2004. That provided a welcome bounce to Western carmakers such as VW and GM and fueled the rapid expansion of local manufacturers including BYD and Great Wall Motor. No more. Automakers in China have gone from adding extra factory shifts 6 years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times. The construction spree has added 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales.

“The Chinese market is hypercompetitive, so many automakers are afraid of losing market share. The players tend to build more capacity in hopes of maintaining or gaining market share,” says a Bloomberg analyst. Worse, the combination of too many new factories and slowing demand has dragged down the industry’s average plant utilization rate, a measure of profitability and efficiency. The industrywide average plunged from more than 100% six years ago (the result of adding work hours or shifts) to about 70% today, leaving it below the 80% level generally considered healthy. Some carmakers are averaging 50% utilization.

Excess capacity is raising the pressure on carmakers to step up discounts to push sales and keep production lines busy. The markdowns can be huge. Motorists can buy an Anhui Jianghuai car for $9,642, 60% off its sticker price. The offering price of Audi’s A1 is being cut by up to 35%. And with capacity growth expected to continue outpacing demand, the industry’s return on invested capital in China will decline from 19% in 2014 to 10.5% by 2018.

Classroom discussion questions:

Why is overcapacity an operations problem?
What is causing overcapacity in the industry today?

OM in the News: Manufacturing Capacity Can’t Be Turned Off and On Easily

A typical high-rise office building can require 100's of thousands of square feet of metal-framed glass panels — A typical high-rise office building can require 100’s of thousands of square feet of metal-framed glass panels

A shortage of glass is taking a toll on the nation’s commercial building boom, adding millions of dollars to the cost of new skyscrapers and halting some projects midway through construction, reports The Wall Street Journal (Sept. 8, 2015). Demand is soaring for the metal-framed glass panels, or curtain wall, used to sheath skyscrapers. Those buildings need a lot of glass. But glass manufacturers and fabricators can’t keep up. Many mothballed their operations or went out of business during the 2008 recession, which hit the construction industry hard.

Now, however, apartment buildings and office towers are sprouting up at their briskest pace in decades. Restarting idled glass factories is a costly and time-consuming process, a perfect example of capacity planning in Supplement 7. In the meantime, curtain-wall prices, which have risen more than 30% in the past 18 months, are setting records. Glass accounts for 1/4 of a construction project’s budget, so the extra expense can add tens of millions of dollars to a building’s cost.

The glass that ends up on the outside of an office building is manufactured in giant tanks in which sand is melted at 2,000 degrees Fahrenheit. Long ribbons of raw glass are floated down a river of molten metal. This “float glass” is then cut into pieces, customized to order, and the panels are sent to contractors who fit them into metal frames to produce panels that meet the builder’s specifications.

Producers shut 11 out of 47 float-glass manufacturing plants in North America between 2007 and 2014. Building a new plant can cost hundreds of millions of dollars, and restarting an idled line can take months because workers have to jackhammer thousands of pounds of hardened glass to remove it from melting tanks. “Once you take one of those tanks out of commission, you can’t just turn it back on,” said a PPG exec.

Classroom discussion questions:

Why is the lead time so long in adding glass capacity?
Which of the tactics for matching capacity to demand (See Supp. 7, p. 302) apply in this situation?

OM in the News: It’s Raining Cars in China

Three years ago, China’s Chery Automobile announced plans to expand its factories to make as many as 1 million vehicles a year. But demand didn’t grow as planned. So Chery today has the capacity to make 900,000 vehicles annually—twice the number of cars it sold last year. Sales have slumped by 1/3 since their 2010 peak. “Chery is a classic case” of overcapacity, says a Shanghai-based consultant.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins, writes BusinessWeek (Feb.16-22, 2015). By 2017, there will be 140 car production plants in China, vs. 123 at the end of 2014. Factories across the mainland in 2015 will be able to build 10.8 million more vehicles than will be sold in Greater China. In North America, however, plants will churn out about 3.2 million more cars this year than the factories were intended to produce when they were built.

Overcapacity is only expected to get worse for Chinese carmakers. China will have about 11.4 million vehicles’ worth of idle capacity by 2017, more than double that of European automakers. Some carmakers already are regretting plans for Chinese plants that will open in the next few years. But that decision has been made and they cannot backtrack.

Foreign carmakers have been among the most enthusiastic factory builders in China, with Hyundai, Renault, and Fiat Chrysler among those that have announced plans or are already building in China. GM will soon sell Buicks made at a plant that opened last month, with plans to open a Cadillac factory later this year. GM has 22 factories on the mainland. Volkswagen, which is vying with Toyota and GM for the global auto sales crown, has 28 plants in China and will open 3 more within the next few years.

Classroom discussion questions:
1. What are some tactics for matching capacity to demand (see Supp.7)?

2. Why are auto makers flocking to China?

OM in the News: Coach Gets More Crowded

“Skinny is all the rage on the runway right now,” writes The Wall Street Journal (Oct. 29, 2014). Delta, United, American, Southwest and other airlines around the world have installed seats with trim metal frames and ultrathin cushions, squeezing rows closer together to pack more people on each flight. Three-quarters of Delta’s domestic fleet and 1/4 of United’s now have the new slim-line seating. The lightweight seats—and even some new, skinnier bathrooms—improve airlines’ bottom line, with less fuel burned per passenger and more tickets sold per flight. (The new seats weigh just 24 pounds per passenger, or 30% less than traditional models). But passengers can feel the pinch: Some complain about stiff padding and knee-knocking issues, and liken flying in the new seat to squeezing next to strangers on a crowded park bench.

Each row of coach seats used to have 32 or 33 inches of space front to back for a seated passenger between seat backs—a measurement called seat pitch. But now many big airlines are down to 31 inches of seat pitch. United goes as tight as 30 inches on some of its Boeing 737s. And it’s going to get worse. Boeing just announced the launch of new, denser seating on 737s called 737 MAX 200, aimed at low-cost airlines. The new MAX 200 version will be fitted with 200 seats. The current version of the same plane typically has 160 seats. Seat pitch on the new version will be as tight as 28 inches.

A survey by TripAdvisor of travelers who had tried the new seats found 83% said they were less comfortable than traditional seats. United, Delta and others say other coach improvements such as video on-demand and Wi-Fi help compensate for tighter seating. “Seats need to be comfortable. But other aspects are important, too, including entertainment, appearance and service,” says Delta.

Classroom discussion questions:

1. From an OM perspective, what are the advantages and disadvantages of the new seats?

2. Why are passengers concerned about the thinner seats?

OM in the News: Gearing Up Capacity at FedEx and UPS

Facing an even bigger mountain of packages this holiday season, FedEx and UPS are hiring more workers to avoid the delays that frustrated shoppers and gift-recipients a year ago. Last December, the delivery giants were caught off-guard by bad weather and a surge in last-minute online shopping, writes Supply & Demand Chain Executive (Oct. 24, 2014). An estimated 2 million packages were late at Christmas. FedEx expects deliveries between Thanksgiving and Christmas Eve to rise 8.8% over last year, to 290 million shipments. Volume is expected to surge in December, with FedEx predicting a peak of 22.6 million shipments on Monday, Dec. 15.

The delivery companies are benefiting from a strengthening economy and optimism about consumer spending. At the same time, they’re dealing with consumers who increasingly enjoy the ease of shopping on computers and mobile devices but expect the goods to show up almost as quickly as if they had shopped at a store. “Every single year the percentage of retailers offering free shipping goes up,” said an industry expert. “The consumer expects it. The retailer may or may not be able to afford it.” Target has started offering free holiday shipping for any item on its website, a first for the retailer as it tries to compete better against online rivals such as Amazon.com.

FedEx plans to hire 50,000 seasonal workers, up from 40,000 last year. UPS will add 95,000 people, up from 85,000. Last year, both companies wound up scrambling to hire more seasonal employees than they had planned, which increased costs and cut into profits. FedEx also expects to invest $1.2 billion in its ground-shipping network this fiscal year, with most of that going to increase capacity and automation. The improvements have sped up ground delivery by a day or more in 2/3 of the U.S. UPS has also invested to boost shipping capacity during the holidays, and has improved its forecasting and package tracking.

Classroom discussion questions:

1. Which techniques (see Supplement 7) for managing capacity and demand do FedEx and UPS employ?

2. How will the shippers be able to improve over last year’s backlog?

OM in the News: Chipotle’s Burrito Velocity

“Another year, another breakthrough in Chipotle’s blinding burrito-making speed,” writes Quartz (April 21, 2014). Over the first 3 months of 2014, the US Mexican-food chain saw an average increase of 7 transactions per hour at both peak lunch and dinner hours—12 to 1pm and 6 to 7pm. On Fridays, one of its busiest days of the week, Chipotle fielded 11 more customers per hour at lunchtime on average across its stores, a 10% increase.

“One important element of delivering great customer service is you’ve heard us say over and over is faster throughput,” says the CEO. “We’re excited that our teams are ready to break new throughput records.” Another way to think about throughput is to think about it as burrito-velocity—that is, the speed it can funnel a customer and the burrito being made for them from the beginning of its line to its end. The chain puts every part of its assembly line under a microscope to make sure it functions as efficiently as possible.

As far as the company is concerned, faster service is the same thing as better service. For that reason, the chain is finicky about things Chipotle-lovers likely hardly even notice. Credit cards, for instance, are better than cash, because they’re faster. And that person who wanders around cleaning off counters and re-filling empty meat, vegetable, rice, and bean containers is crucial. In fact, she even has a title: linebacker. Linebackers, who patrol countertops, replace serving-ware, and refill bins of food, are one of Chipotle’s four, Maoist-sounding pillars of effective lightning-speed service. The others, which together make up what the chain refers to as its “four pillars of great throughput,” include the extra person between the one who rolls your burrito and the one who rings up your order, a commitment to having every ingredient and utensil in its place, and finally, making sure its best servers are always working at peak hours. Some of Chipotle’s fastest restaurants currently run more than 350 transactions per hour at lunchtime, which equates to nearly 6 transactions per minute!

Classroom discussion questions:
1. Why is throughput such an important OM measure at Chipotle?

2. What are the four pillars of great throughput?

OM in the News: Keeping Some Slack in the Operating Room

Operating rooms at St. John’s Regional Health Center, an acute-care hospital in Missouri, had been running at 100% capacity. When emergency cases—which make up about 20% of the full load—arose, the hospital was forced to bump long-scheduled surgeries. As a result, doctors often waited several hours to perform 2-hour procedures and sometimes operated at 2 a.m. Staff members regularly worked unplanned overtime. The hospital was constantly behind, according to this interesting article in Strategy + Business (Spring, 2104).

The rather surprising solution: Leave one room unused. Crazy idea? The facility was already being squeezed, and now comes a recommendation to take away even more capacity?

On the surface, St. John’s lacked operating rooms. But what it actually lacked was the ability to accommodate emergencies. Because planned procedures were taking up all the rooms, unplanned surgeries required a continual rearranging of the schedule—which had serious repercussions for costs and even quality of care. The key to finding a solution was the fact that the term unplanned surgery is a bit misleading. The hospital can’t predict each individual procedure, but it knows that there will always be emergencies. Once a room was set aside specifically for unscheduled cases, all the other operating rooms could be packed well and proceed unencumbered by surprises. The empty room thus added much-needed slack to the system. Soon after implementing this plan, the hospital was able to accommodate 5.1% more surgical cases overall, the number of surgeries performed after 3 p.m. fell by 45%, and revenue increased. And in the two years that followed, the hospital experienced a 7 and 11% annual increase in surgical volume.

As Bottleneck Analysis and Theory of Constraints in Supplement 7 suggests, removing a bottleneck can be most helpful in improving throughput. Slack is often undervalued because what appears to be an unnecessary luxury, but in fact may let the system perform at a higher level of efficiency, as was the case at St. John’s.

Classroom Discussion Questions:

1. What are the costs at St. John’s for not having ‘slack’ and for having ‘slack’?

2. How does St. John’s solution compare to the solutions in Examples S3 and S4 (pages 304-305)?

OM in the News: Auto Makers Dare to Boost Capacity

Nissan's new Mexican plant will produce 1 million cars — Nissan’s new Mexican plant will produce 1 million cars

The auto industry’s recent fat profits from rising demand for new cars in North America is about to confront the law of supply and demand: A string of new factories in the region will start cranking out more than a million cars over the next few years. A large increase in production capacity poses a serious risk for auto makers, writes The Wall Street Journal (Jan.15, 2014). They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%.

VW said it would build a new North American plant as part of a near term plan to invest $7 billion in the region. That will be in addition to a factory already under construction in Mexico and its 2-year-old plant in Chattanooga, TN, which now operates at only 50% of capacity. Honda, Mazda, and Nissan are opening new plants in Mexico, while Ford, Toyota, and GM are all expanding capacity at their existing plants in the U.S. and Canada.

Some CEOs, like Fiat/Chrysler’s Sergio Marchionne, are already concerned about overcapacity. “The last thing we need is to get bricks-and-mortar capacity increased. Building new plants isn’t the only trend to watch, because increasing the use of automated production lines can boost output at existing factories,” he states. Marchionne knows the trouble that idle factories can cause. Excess production capacity and the use of heavy price discounting were two of the problems that contributed to Chrysler’s slide into bankruptcy in 2009. In Europe, where auto sales have fallen amid the continent’s prolonged economic slump, Fiat, Peugeot, and GM all have underused plants and are struggling to stem losses.

Classroom discussion questions:

1. Figure S7.6, in Supp. 7 (Capacity and Constraint Management), illustrates 4 approaches to expansion. Which approach are these firms taking?

2. What are the main considerations in capacity decisions?

OM in the News: Shipping Bottleneck Hit UPS on Xmas Eve

In the earliest hours of Dec. 24, packages poured into UPS’s main hub, called Worldport, in Louisville, Ky. And they were piling up. Employees responsible for sorting packages—already deep into a 100-hour week—were furiously getting them ready to be sent on to their destinations. But dozens of other workers responsible for loading those packages into planes to be shipped out were left standing around idle, because the unexpected glut of packages from last-minute shoppers had swamped the company’s air fleet.

The dearth of planes stranded a large volume of packages in Louisville that day. Many of those that did make it out were shipped too late to make delivery trucks’ pickup schedules and were left sitting in warehouses not far from their destinations. By sundown, UPS was forced to tell many Americans that the gifts they had ordered wouldn’t arrive before Christmas as promised.

“The bottleneck was largely in UPS’s air business,” writes The Wall Street Journal (Dec.27, 2013), “which retailers leaned on heavily in the past week as they scrambled to fill down-to-the-wire orders.” UPS originally expected to ship about 3.5 million packages at Worldport. The facility handles on average 1.6 million packages a day. Likely double that many packages arrived during the last-minute crush. On Christmas Eve UPS admitted that the volume of air packages in its system had exceeded its capacity.

UPS carefully plans how it will handle the holiday peak. Extra resources such as additional cargo planes had been lined up as “hot spares”— aircraft that could be fired up quickly in case of a logistics emergency. But it ran into a confluence of factors. Retailers have been encouraging online sales, and they likely contributed to the logjam by offering some of their best discounts late in the season in a final push for sales.

Classroom discussion questions:

1. How has e-commerce impacted shippers such as UPS?

2. How can operations managers avoid such bottlenecks?

OM in the News: The Capacity Dilemma at Apple Stores

Apple's store on London's Regent Street — Apple’s store on London’s Regent Street

“It’s only a 2-hour wait,” writes The Guardian (Oct.18, 2013). “An ordinary Thursday afternoon at Apple’s flagship London store and a long line of customers snakes across the first floor.” The technology brand is used to queues for the launch of its latest must-have product, but these people have come carrying faulty iPhones and malfunctioning laptops, desperate for help from one of Apple’s increasingly hard to reach “Genius” experts.

When it opened in Virginia in 2001, the first Apple store was hailed as a retail revolution, allowing shoppers to play with expensive technology without any sales pressure. The emphasis on service, with blue shirted Geniuses on hand to answer queries and fix broken products, has become almost as important to the Apple brand as the aesthetic appeal of its products. But the whole experience is under pressure as a relatively small number of shops struggle to cope with rapidly growing customer numbers. Apple stores–there are only 415 worldwide–have a turnover of $19 billion and the highest sales per square foot of any retail chain.

The Regent Street outlet, for example, employs 120 Geniuses. Each sees up to 30 customers a day but it is impossible to book an appointment less than a week in advance. If the problem is urgent you can turn up and queue, but it could be a very long wait. The problem is not limited to London. In Apple’s Paris flagship store, there were no appointments available for 10 days. There are even reports of scalpers selling Genius Bar reservations in China. Some argue that Apple needs to take itself further upmarket, so it can serve fewer customers more effectively. Or, to cope with growing demand, should Apple open more shops and come up with clever ways of tackling overcrowding?

Classroom discussion questions:

1. What OM options does Apple have to deal with the capacity constraints?

2. To what extent should Apple handle walk-ins?

OM in the News: Trying to Shutter a French Auto Plant

peugeot plant At Peugeot’s soon-to-close car factory just north of Paris, writes Barron’s Business (Sept.9, 2013), management is grappling with an ambitious year-end production quota: finding jobs for the factory’s nearly 3,000 workers. This was the promise Peugeot made to win government and union approval for closing the largest French auto plant in 2 decades. The job placement effort, costing $749 million, underscores how expensive and time consuming it is to close even a single factory in Western Europe, when it is politically feasible at all.

Peugeot joins companies, including GM and Ford, that have begun the process of closing plants in Western Europe, where a glut of excess production capacity has made many factories unprofitable. But even though more shutdowns are necessary to adapt to depressed European sales, tough experiences for all 3 car makers may give others pause.

“It can cost a billion euros ($1.31 billion) or more to close a vehicle-assembly plant in Western Europe,” said one expert, who said companies have put off closing plants because of the cost. “That’s not an environment that encourages investment.” (U.S. factory shutdowns were quicker and cheaper to pull off. In the U.S., auto makers culled 24 factories during the 2008 economic meltdown.)

Peugeot has been through a year long wringer, with political obstacles followed by union protests that at times turned violent. In the end, the company agreed to give its workers a package of retraining, job placement and severance benefits that are generous even by French standards. As an example, a dozen auto workers were taking shifts driving a bus in a parking lot to train for future jobs Peugeot has lined up for them at Paris’s transit agency. Peugeot is paying for the $13,000-a-person training. “It is the least they can do,” said one worker.

“The alternative to shutting down capacity is being more flexible with capacity,” said Peugeot’s HR chief.

Discussion questions:

1. Why do European governments prevent plant shut downs?

2. What capacity options exist for an auto plant (see Supplement 7)?

OM in the News: US Auto Makers Shift to Full Capacity

Supplement 7 discusses a variety of tactics for matching capacity to demand. This Wall Street Journal (Aug. 17-18, 2013) article describing how more U.S. auto plants are cranking out cars around the clock provides a perfect example of these to use in class. After years of layoffs, plant closures and bankruptcies, U.S. auto makers are pushing factories to the limits. At GM, Ford, and Chrysler, more flexible union agreements now allow the companies to build cars for 120 hours a week or more while paying less in overtime pay.

Nearly 40% of car factories in North America now operate on work schedules that push production well past 80 hours a week, compared with 11% in 2008. “There has never been a time in the U.S. industry that we’ve had this high a level of capacity utilization,” says one industry expert. In 2005, the industry had 925,700 employees. In 2012, the workforce stood at 647,600.

Changes in union labor contracts have been critical to running auto factories harder. The Detroit Three now can schedule work at night and on weekends without paying as much in overtime as they would have in the past. Adding a third shift, as many plants have done, also reduces overtime. Overtime pay also starts after 40 hours a week, not after 8 hours a day as in the past. And a newly hired Detroit factory worker now earns about $15/hour versus $28/hour for veteran workers.

In Toledo, Chrysler is building all the hot-selling Jeep Wranglers it can. The plant has been running nearly round the clock, churning out about 800 Jeeps a day and using overtime to staff production lines 20 hours a day, 6 days a week for the past 2 years. Temporary workers fill in when regular employees aren’t available. Ford has gone a step further, adding a 4th crew of workers at some plants to keep those factories running 152 hours out of the 168 hours in a week.

Discussion questions:

1. How are automakers increasing capacity with fewer workers?

2. Why is capacity adjustment such an important OM issue?