Quantifying the advantages of production quota flexibility in the automotive industry

Manufacturers use production quotas to smooth and synchronize production. We use a Markov chain to quantify the effect of quota flexibility on overtime and inventory costs. This quantification allows us to trade off these costs to find the optimal amount of quota flexibility. We define quota flexibility as the permitted amount and duration of deviations from the cumulative quota. We specifically analyse the cost savings as a function of the maximum allowed deviation amount from the cumulative quota for four policies. These example policies are the four permutations of two factors: whether or not backlogging is permitted; and whether or not actual production and the quota must be reconciled weekly. We apply the model to three automotive assembly plants and conclude that permitting modest flexibility in production quotas (of ? 1 h of production) significantly reduces total cost.