Overview

Delivering the most vehicles at the lowest cost has been the operating principle of vehicle assembly plants since their conception. Decades later, plants still strive to attain and leverage scale. It is what they do not because it is a well-thought-out strategy but because they have been carefully programmed to repeat an ingrained pattern. Volume, as we described earlier, has always been the shining prize, awarded to those who can squeeze the last bit of capacity from their facilities. Manufacturers raise the bar, and plants oblige by accepting the minimum efficient scale of 200,000 vehicles per annum.

The problem is that companies rarely attain the right volume. The minimum scale soars, demand shifts, inventories grow, incentives are offered, customers grudgingly drive the cars off the lot, and everyone goes home happy that sales are up.

Not that volume per se is a bad thing in theory, economies of scale can do wonders for a bottom line but the emphasis on capacity use has blinded manufacturers to volume s darker side. There is volume that responds to natural customer demand, and then there is volume pumped up by sales incentives. Thus, when analysts come to the earthshaking insight that high capacity use is a main determinant of profitability, ^[1.] we have to say That depends on what you re using the capacity for. In 2002, sales were decent...