The cost of flexibility

In the automobile industry, the variety of vehicles produced continues to increase. At the same time, historically firms have incurred a sizeable productivity penalty for producing more variety in their plants. The purpose of this paper is to answer the question: what actions have firms taken to control this productivity penalty and what were the costs?

Estimate a number of statistical models of the effect of variety on productivity for a sample that includes almost all assembly plants in North America from 1994 to 2004.

Evidence is found for fixed costs associated with activities that are complementary to producing variety and for a trade‐off between scale economies and flexibility.

Provides evidence that while flexibility has an advantage to cope with increasing variety, there are non‐negligible costs as well.

A first systematic evaluation on the scale‐scope trade‐off and a quantification of the gains from production flexibility in the automotive industry.