Tag: Capacity

OM in the News: Toyota Remakes Its Biggest Plant

Toyota’s largest plant in the world sits on 1,300 acres in rural Kentucky. With floor space equal to 170 football fields, the Georgetown factory houses more than 2,000 industrial robots, 6 cafeterias, and 2 paint shops. Its newest order of business has been to add the gas-electric hybrid version of the popular RAV-4 SUV to one of the plant’s three assembly lines, writes Businessweek (Oct. 7, 2019).

Georgetown is fighting to hold on to its status as Toyota’s biggest plant as demand for its sedans has plummeted and the 3-decade-old factory deals with high fixed costs, falling productivity, and the rise of a network of sibling plants in North America churning out more popular crossovers, SUVs, and trucks. When the factory opened, it was designed to assemble hundreds of thousands of mass-market vehicles, such as the midsize Camry. For 27 years that was Toyota’s bestselling car in America.

An AGV rolls down the Camry assembly line.

The Georgetown plant’s output peaked at 514,590 vehicles in 2007, just before the Great Recession. Americans’ appetite for sedans didn’t keep pace with a recovery in auto demand over the past decade. In 2018, Georgetown’s production totaled 430,224 cars, a sign of rapidly changing auto tastes. That meant investing $238 million more in Kentucky to add the RAV4 hybrid, bringing Toyota’s total investment in the plant to $7 billion.

Georgetown’s ebbing fortunes have increased pressure to cut costs and boost efficiency: it is now less expensive to build a Camry in Japan and ship it to Kentucky than to manufacture one locally. Kentucky is installing advanced flaw-detecting cameras, self-driving supply carts, and systems for sequencing component delivery so fewer parts need to be stored on the factory floor. That will require fewer workers doing manual tasks and will boost efficiency in line with newer factories. Toyota also is reconfiguring equipment to match its most flexible factories in Japan, which make a half-dozen different models on the same assembly line. So one of the big things that is changing is the plant layout.

Classroom discussion  questions:

  1. Why is plant capacity a vital issue here?
  2.  What changes have negatively impacted the plant’s success?

OM in the News: Capacity Planning and the 737 Max Grounding


Grounded Boeing 737 Max airplanes are stored in an area adjacent to Boeing Field in Seattle

The extended grounding of Boeing Co.’s 737 Max planes forced airlines across the globe to scale back growth plans for next summer, putting the airline industry on notice that the crisis is starting to affect longer-term plans. With a return date for the Max still uncertain after two fatal crashes, one  airline, the Irish carrier Ryanair, will receive barely half of the 58 planes it was expecting for the 2020 peak schedule. Ryanair estimates that the reduction will wipe 5 million passengers from its full-year tally.

Although U.S. operators of the Max haven’t yet talked about changing their growth plans beyond this year or readjusted deliveries, it will probably take 15 to 18 months for the carriers to catch up to their original schedules, writes The Los Angeles Times (July 16, 2019). (The timing depends on Boeing resuming its original delivery schedule, after slowing Max production rates to 42 from 57 aircraft a month). American Airlines and United Airlines just pulled the Max off their schedules through early November, in the latest sign the jet may not resume commercial service this year. Carriers will probably limit the expansion of the seat supply until late next year. Capacity growth will likely remain muted until the end of 2020 so that the first ‘normal’ year for capacity growth will be 2021.

Aviation regulators grounded the newest 737 after two crashes killed 346 people. In June, the FAA disclosed a separate software glitch it had found during simulator testing. That issue requires additional work by Boeing and is further delaying the Max’s return to service.

Classroom discussion questions:

  1. How can airlines forecast available capacity in a unique situation like this?
  2. What options do airlines have when planes are not delivered as planned or taken out of service?

OM in the News: UPS, Capacity, and a Busy Holiday Shipping Season

UPS is counting on a big boost in shipping capacity to avoid logjams in its network during the peak holiday shipping season, and the delivery giant is raising prices to help offset those investments. The company is planning to deliver 800 million packages in the U.S. between Thanksgiving and Christmas, up from 750 million last year, reports The Wall Street Journal (Oct. 25, 2018). Nearly every delivery day during that stretch will see volume of more than 30 million packages!

To handle the surge in packages driven by online shoppers, UPS is building more automated sortation hubs, including its 3rd-largest U.S. facility that just opened in Atlanta. UPS says it has added 7 times more processing and sorting capacity this year than it did in 2017. To offset those costs, it is pushing up prices on domestic deliveries and adding surcharges on oversize packages. In the U.S. business, revenue per piece rose 4.8% in the 3rd quarter, the fastest growth since 2011.

UPS also working closely with more of its largest shipping customers, like Amazon, on better forecasting demand during the period, including predicting volume based on where it’s shipped from and coordinating with shippers when they have promotions. The company hopes to avoid unexpected volume surges that caused delivery delays in the past. “The last couple (years) we’ve been constructively dissatisfied,” UPS’s COO said. “Our goal is to have this peak be the peak we all want it to be through the eyes of our customers.”

UPS is addressing its recent declining profit by trying to woo more higher-quality businesses—including small- and medium-size customers and health care companies—to offset predominantly lower-margin shipments tied to e-commerce.

Classroom discussion questions:

  1. What tactics for matching capacity to demand that we discuss in Supplement 7 is UPS employing?
  2. How might UPS’s moves impact profit and revenue?

OM in the News: An Airplane Seat that’s Ergonomic?

A coach seat designed for a Singapore Airlines premium economy cabin under construction at the Zodiac Aerospace factory in Gainesville, Texas

Do you ache all over after flying in a coach seat? That could be by design. Airlines have lots of choices when they order seats for their airplanes. Those selections go a long way to determining how comfortable—or uncomfortable—their customers will be. (See The Wall Street Journal (July 19, 2018) and (July 25, 2018).)

The seat bottom is one of the most crucial elements in seat comfort, and one of the most carefully studied. Longer is better: You get more support under your thighs. Most U.S. airlines go with an average of about 18 inches. Singapore Airlines designed a Zodiac brand seat for its premium economy cabins on long-range Airbus A350s that has a 19-inch seat bottom. Those seats also have leg rests, which can take strain off muscles and increase blood flow.

Another airline choice that affects your comfort: how high the seat is off the floor. About 18 inches is standard, but some European airlines with generally tall clientele want seats constructed higher, so long legs rest more naturally. Some Asian airlines order seats at 17 inches cushion height. Airlines have their long-held prejudices on seats. Some prefer a firm cushion. Others want softer. Even when manufacturers suggest one particular firmness that they think provides ideal support and comfort for most passengers, some airlines insist on modifications.

Manufacturers say they can achieve greater comfort when the support materials and padding distribute weight so that as little as possible falls on a pair of bones on the bottom of the pelvis. To test designs, manufacturers typically recruit lots of volunteers to sit in seats for hours, recording both data and comments on how uncomfortable they are. Zodiac offers a 2-hour seat, a 2-to-6 hour seat and a seat for flights 8 hours or longer.

Classroom discussion questions:

  1. Why is an ergonomic chair an OM issue?
  2. Compare the seats at various airlines. How do they relate to corporate strategies?

OM in the News: Disneyland’s Dynamic Pricing Model

Disney’s theme parks in the U.S. can fill to capacity during certain times of year.

After raising some ticket prices for its theme parks by more than 20% over the past 5 years, Walt Disney will set a new benchmark when it offers die-hard fans the chance to attend a 6-hour preview of a new attraction at Disneyland — for $299. Even for fans used to high prices, the sneak peek at Pixar Pier breaks new ground.

The steep price stems in part from a perennial tension Disney faces at its theme parks, where public demand is so strong, reports The Wall Street Journal (June 19, 2018). Raising prices — currently around $100 on average days and more than $120 during “peak” times around holidays — could mitigate tourist appetite and increase profits. The company, however, is wary of appearing to gouge customers. Disney is working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased. Disney already has introduced a limited version of dynamic pricing to its parks, charging a range of prices based on 3 categories of dates: “value,” “regular” and “peak.” Prices range from $97 to $135 for Disneyland.

Under the new changes, a ticket to Disneyland for Christmas Day, for example, may cost less if purchased on July 1 than on Dec. 24. This would encourage visitors to commit to a day to visit the park farther in advance, which allows parks to plan better. Disney parks often reach their limit during the summer tourism season and over Christmas break, when the parks sometimes have to turn away would-be customers for several hours.

New attractions at the parks help Disney to handle crowds, but they also draw more visitors. Disney’s “Avatar”-themed experience has drawn crowds that can cause waiting times for some rides to average 1-2 hours—and in some cases, stretch to 4 hours.

Classroom discussion questions:
1. How does Disney’s use of yield management differ from that of airlines?

2. How does Disney deal with capacity issues (see the 6 points on page 313)?

 

 

OM in the News: GM Wrestles With Excess Capacity

Despite its drastic downsizing a decade ago under a federally funded bailout and bankruptcy restructuring, General Motors again finds itself with too many U.S. factories that can turn out too many vehicles. GM’s factory-utilization rate in North America averaged 95.1% over the past two years, below Ford’s 111.9% and Toyota ’s 101.4%. (Rates can exceed 100% when factories work a 3rd shift or schedule overtime work on weekends.) The auto industry often runs its factories dawn-till-dusk or even around the clock to boost their efficiency, writes The Wall Street Journal (Oct.10. 2017).

Factory-utilization rates typically measure how much production capacity a plant uses based on a 16-hour workday. GM says its utilization rate is 100% on average when its round-the-clock truck and SUV lines are figured in with the relatively sleepy factories making cars. GM said it is working to “drive further improvements” in its plant utilization, including adding crossover SUVs to more factory lines. A plant in the Kansas City area that now makes only the Malibu is scheduled to begin assembling a small Cadillac SUV by late 2018. But such a switch-over typically takes car makers several years of lead time, to order and install new assembly-line equipment and tooling.

GM operates 17 vehicle-assembly plants in North America, after closing several during its bankruptcy. Most, except for 5 that operate around the clock to build trucks and SUVs, have ample unused capacity.

Classroom discussion questions:

  1. How is capacity computed in the auto industry?
  2. What can GM do to bring capacity in line with demand?

OM in the News: Johns Hopkins’ Capacity Command Center

Johns Hopkins Hospital’s state-of-the-art, advanced hospital control center
Johns Hopkins Hospital’s state-of-the-art, advanced hospital control center

Johns Hopkins Hospital, reports Analytics Magazine (Jan.-Feb., 2017), recently launched an advanced control center to better manage patient safety, experience, volume, and the movement of patients in and out of the hospital. The Capacity Command Center incorporates systems engineering principles, which are commonly seen in aerospace, aviation and power industries, but are rare in hospitals.

In the one room center, 24 staff members work together, equipped with real-time and predictive information, and empowered to take action to prevent or resolve bottlenecks, reduce patient wait time, coordinate services, and reduce risk. The command center also houses a sophisticated system with a wall of computer monitors that provides situational awareness and triggers the center team to take immediate action. During a typical afternoon, the system receives about 500 messages/minute from 14 different hospital IT systems generating real-time data. “In the past, like most hospitals, we were dependent on traditional technology – phones, email and IT systems – to manage the hospital, assign beds, etc.,” says a hospital exec.

The technology in the command center keeps staff members informed 24/7 about when there is an influx of patients coming into the hospital, which hospital units need additional staff members, the status of how many patients are being treated, the need for and availability of beds across the hospital, the highest-priority admissions and discharges, and other essential information.

Early results demonstrate improved patient experience and operational outcomes such as: (1) 60% improvement in the ability to accept patients with complex medical conditions from other hospitals; (2) critical care team is now dispatched 63 minutes sooner to pick up patients arriving in ambulances from other hospitals; (3) patients are assigned a bed 30% faster from the ER; (4) transfer delays from the OR after a procedure have been reduced by 70%; and (5) 21% more patients are now discharged before noon.

Classroom discussion questions:

  1. Why have hospitals been slow to adopt these process control procedures used in other industries?
  2. What hospital functions could benefit from the command center concept?

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

harry potterUniversal 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:

  1. Describe yield management.
  2. 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%
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:

  1. What other approaches could speed the exit lines?
  2. 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:

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

OM in the News: Coach Gets More Crowded

airline seats“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

fedexFacing 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: Keeping Some Slack in the Operating Room

hospitalOperating 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: Heinz Goes on a Diet

Heinz's Pocatello factory scheduled for closure
Heinz’s Pocatello factory scheduled for closure

For years, H.J. Heinz Co. managers considered their frozen-food plant in Pocatello, Idaho, the heart of potato country, a model factory, ranking it the best in the U.S. in 2009 and 2011 for safety, cleanliness and efficiency. But in November, 2013, Heinz said it would close the Idaho plant this year. It may have been a model factory, writes The Wall Street Journal (Feb.11, 2014), but it also was an example of the kind of dubious logistics that were costing Heinz money. Frozen enchiladas, for instance, were trucked nearly 1,000 miles from a factory in San Diego, packaged with rice and sauce by workers in Pocatello then shipped across the country to distribution centers on the East Coast.

The market for packaged frozen foods had been hit hard by a broad consumer shift to fresher foods. And Heinz had too much production capacity in that sector. It had built a new frozen-food factory in South Carolina in 2009. Moreover, Pocatello was situated far from Heinz’s other factories and from its main markets. Roughly 70% of all ingredients used in the factory are shipped in from east of the Mississippi, well over 1,000 miles away. Others came from Denver, nearly 600 miles to the south.

A similar announcement at another plant last November proved tumultuous. Managers at a century-old Heinz ketchup factory in Leamington, Ontario, told several hundred employees that their plant also was to be closed. Some started cursing, crying and knocking over chairs, and others stormed out. The company will consolidate its frozen-meal operations at its factory in Ohio, which, according to its spokesperson, is “the most central location to customers, distributors and the supplies we need.” He added that the decision to close the Idaho plant “is based primarily on factory location in relation to our customer/consumer base and the need to improve transportation efficiencies and the fact we have we have excess frozen manufacturing capacity.”

Classroom discussion questions:

1. Why is Heinz closing the two factories?

2. Which of the factors that affect location decisions (see Chapter 8) influenced Heinz?

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?