In November 1990, Chrysler Corporation announced plans to initiate three shift or nearly continuous (21-hours –per-day) production at a number of its plants. Explain why Chrysler’s decision might have been prompted by movements in its wage costs or capital costs, or both. Why would Chrysler have instituted this production change for its most popular (and profitable) vehicles, its minivans and Jeep Cherokee? What risks might such a plan pose?
Chrysler's decision to initiate three-shift or nearly continuous production in November 1990 might have been prompted by movements in its wage costs, capital costs, or both.
1. Wage Costs: One possible reason for this decision could be the movement in wage costs. If Chrysler experienced increasing labor costs, such as higher wages or benefits for its workers, implementing three shifts or nearly continuous production would allow the company to maximize the utilization of its workforce without incurring additional labor costs. By operating the plants for longer hours, the company could produce more units without having to hire additional employees, thus optimizing its wage costs.
2. Capital Costs: Another factor that might have prompted Chrysler's decision is movements in capital costs. If Chrysler had significant investments in its production facilities or equipment, it would want to maximize the return on those investments. By extending production hours, the company could spread the fixed costs of its capital investments over a greater number of units, reducing the average cost per unit. This would allow Chrysler to further increase profitability.
Chrysler likely instituted this production change for its most popular and profitable vehicles, its minivans and Jeep Cherokee, because:
1. High Demand: Minivans and the Jeep Cherokee were the company's most popular and profitable vehicles at the time. These models likely had high consumer demand, which is an important factor in justifying additional production hours. By extending production for these models, Chrysler could meet the increased demand, reduce delivery times, and capture more market share.
2. Profit Margins: As the most profitable vehicles in Chrysler's lineup, producing more minivans and Jeep Cherokees through extended production hours would lead to increased revenue and higher profit margins. The company could maximize its profitability by focusing on these high-demand models.
However, implementing such a plan poses certain risks:
1. Employee Fatigue: Operating the plants for longer hours can result in increased fatigue among workers, which may compromise productivity and product quality. Fatigue-related issues could increase the likelihood of accidents and errors, impacting the overall efficiency of the production process.
2. Maintenance Challenges: Extended production hours may strain the company's equipment and facilities, leading to increased maintenance and repair costs. Frequent breakdowns or downtime could disrupt production schedules and potentially affect the company's ability to meet customer demands.
3. Supply Chain and Logistics: To support continuous production, Chrysler would need to ensure a robust supply chain and logistics infrastructure. Timely delivery of raw materials, parts, and finished vehicles would be crucial. Any disruptions within the supply chain could impact production schedules and lead to increased costs.
4. Market Volatility: Adapting production to meet consumer demand is a calculated risk. If market conditions change suddenly, such as a decrease in demand or economic downturn, Chrysler may find itself with excess inventory and higher costs. Overproduction could result in the need for significant discounts or other corrective actions to avoid losses.
Overall, while implementing three-shift or nearly continuous production can offer advantages in terms of reducing costs and meeting demand, it is not without potential risks that need to be carefully managed.
Chrysler Corporation's decision to initiate three shifts or nearly continuous production at its plants in November 1990 could have been prompted by movements in its wage costs or capital costs, or both.
Wage costs refer to the costs associated with paying employees' salaries and benefits. If Chrysler experienced an increase in wage costs, it might have been driven to explore ways to maximize production efficiency and reduce labor costs. By implementing three shifts or nearly continuous production, the company could make better use of its workforce and potentially increase output without incurring substantial additional labor expenses.
Capital costs, on the other hand, are the expenses associated with acquiring and maintaining capital assets such as machinery, buildings, and equipment. If Chrysler had significant capital investments in its plants, it would be advantageous to utilize them as efficiently as possible. Operating the plants for longer hours allows for a higher utilization rate of these capital assets, maximizing their return on investment and potentially reducing the average cost per unit produced.
Chrysler likely instituted this production change for its most popular and profitable vehicles, such as its minivans and Jeep Cherokee, for several reasons. First, these vehicles were in high demand, which could have led to production bottlenecks or long waiting times for customers. By increasing production capacity through extended shifts, Chrysler could meet customer demand more efficiently and capitalize on the profitable market for these vehicles.
Secondly, minivans and Jeep Cherokee were likely vehicles with higher profit margins compared to other models in Chrysler's lineup. Producing and selling more of these vehicles could have a significant positive impact on the company's overall profitability. Therefore, it made strategic sense for Chrysler to prioritize the production of these popular and profitable models.
However, there are certain risks associated with implementing such a plan. One primary risk is increased employee fatigue and potential burnout due to extended working hours. Long shifts can lead to decreased productivity, accidents, and potential quality issues if employees are not adequately rested. Managing work schedules, offering sufficient breaks, and ensuring a safe working environment would be crucial in mitigating these risks.
Moreover, there might be increased operational costs associated with longer operating hours, such as utilities, maintenance, and supervision expenses. These additional costs would need to be carefully evaluated alongside the potential benefits of increased production.
In summary, Chrysler's decision to initiate three shifts or nearly continuous production may have been prompted by movements in wage costs and capital costs. By maximizing production efficiency and capital asset utilization, Chrysler could meet customer demand more effectively and benefit from increased profitability. However, it is essential to manage employee fatigue and operational costs to mitigate potential risks associated with such a production change.