Friday, January 22, 2016

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 2016/01/TOM revised version of 2015/45/TOM

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, we 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. 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 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. We 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.