Wednesday, July 1, 2015

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 2015/45/TOM revised version of 2013/116/TOM

While there is overwhelming evidence of the negative consequences of product recalls, empirical evidence of operational drivers of recalls is almost non-existent. In this study, we identify product-variety (measured as number of factory installed options), plant-variety (measured as number of models per assembly line in a plant), and utilization as drivers of subsequent manufacturing-related recalls, and we 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. We show that manufacturing-related recalls are positively associated with product-variety and plant utilization, but not with plant-variety. We also find that the interaction 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. We observe similar results with plant utilization. A plant being utilized above 100% capacity is associated with more than eight additional recalls which translates into a cost of $167 million.