Capacity utilisation: Honda Swindon closing for 50 days

Across the world, car companies are finding ways to come to terms with the credit crunch. The US giants are looking for support from the federal government in Washington. Other famous names are finding some way to scale back production.

But cutting production and operating below full capacity is expensive. Students who are familiar with the idea of lean production know that this policy is potentially wasteful and inefficient. So what’s behind Honda’s announcement that it plans to cut production at its plant in Swindon, which will close for 50 days next year?

According to the BBC, Honda will make 21,000 fewer vehicles at the Wiltshire plant, home to the popular Civic model. The 50-day shutdown will mean the Swindon plant will close for the whole of February and March 2009. Earlier this year, Honda announced that it would cut output at Swindon by 32,000 units. With the recent announcement of further production cuts, the Swindon plant will now produce 175,000 vehicles this financial year, down 23% from an original forecast of 225,000 vehicles.

Why close the plant for 50 days rather than just operate at half capacity (or less?). The answer is probably to do with different types of cost. The first step for most manufacturers facing a slowdown in demand is to scale back their direct costs - variable costs like temporary labour. Toyota has just announced plans to cut its Japanese temporary workforce in half. Honda is likely to follow suit. Materials and stock costs will fall too.

The trouble for most firms is that this only goes some way in reducing costs. Indirect costs; the overheads of running a firm like Honda are significant. In trying to reduce these ‘fixed costs’, shutting the factory is probably the best way forwards. Most of these indirect costs will remain (try to think of a few). However, a shutdown is probably cheaper than keeping the factory ticking over at a low rate of output.

This is really a ‘no win’ situation for manufacturers. Under-using capacity is expensive in terms of opportunity cost. It increases the average cost of each car made. Stated simply, for manufacturing to be ‘lean’, production needs to be as close to capacity as possible. Expect to hear of new rounds of (more permanent) factory closures in the months ahead.