A Numerical Example Illustrating Cost of Idle Capacity in Manufacturing

Abstract

We present an elaborate numerical example of a competitive manufacturing industry in the United States facing demand fluctuations to illustrate cost of idle capacity in manufacturing. We show that given demand fluctuations, such as the business cycle, significant cost of idle capacity is not only ordinary and necessary but desirable! We recommend manufacturing firms in the United States increase outsourcing major parts and components to increase output-rates flexibility. Outsourcing is rising in recent years with advances in internet, computers, and telephone. Manufacturers today can depend on getting needed parts “just-in-time” from outside suppliers without maintaining inventories of parts or capacity to produce parts.