Monday, November 18, 2013

Plant Operations and Product Recalls in the Automotive Industry: An Empirical Investigation

SHAH Rachna, BALL George, NETESSINE Serguei
Read the working paper
INSEAD Working Paper 2013/116/TOM

While there is overwhelming evidence of the negative consequences of product recalls, empirical evidence of plant-level drivers of recalls is non-existent. We examine potential plant-level recall causes for North American automotive manufacturers by combining production-line data over a 7-year period with auto-recall data, while differentiating between manufacturing- and design-related recalls. We find that 1) increasing variety does not increase manufacturing recalls, but does increase design recalls; 2) high utilization has a negative effect on both types of recalls; and 3) focus reduces manufacturing recalls. Our results show that manufacturers can use focus and utilization level to mitigate the negative impact of variety on manufacturing recalls. In quantitative terms, we show that 5% increase in utilization leads to an average increase of about 13.6% in manufacturing- and 9.8% in design-recalls. Further, installing three additional options, an increase of roughly one standard deviation, results in an increase of 30% in design recalls.