Automobile; Manufacturing; Strategy; Inventory; Econometrics;
JOURNAL ARTICLE | Management Science | 63 | August 2017
Plant Operations and Product Recalls in the Automotive Industry: An Empirical Investigation
While there is overwhelming support for the negative consequences of product recalls, empirical evidence of operational drivers of recalls is almost non-existent.In this study, the authors identify product-variety (measured as the number of factory installed options), plant-variety (measured as the number of models per assembly line in a plant), and capacity utilization as drivers of subsequent manufacturing-related recalls. They examine their individual and joint effects using a unique dataset compiled for a 7-year period by linking assembly line production data for North American automotive manufacturers with recall data from the National Highway Traffic and Safety Administration.It is shown that manufacturing-related recalls are positively associated with product-variety and plant utilization, but not with plant-variety. The authors also find that the joint effect of plant-variety and utilization is positively associated with increased recalls. In quantitative terms, a one standard deviation increase in the number of options (four additional options) is associated with two additional recalls and costs $46.2 million to automakers over the sample duration. The authors observe similar results with plant utilization. A car built in a plant which is being utilized above 100% capacity, is associated with more than eight additional recalls which corresponds to a cost of $167 million.