The effect of manufacturing overhead on policies for allocating production capacity

Abstract

This research explores how manufacturing overhead influences profit margins under different capacity allocation policies in a build-to-order context. By applying a multi-period Mixed-Integer-Programming model to assess industries with varying overhead structures, the study establishes a link between the levels of capacity allocation and profitability, underscoring the strategic significance of overhead costs in capacity management decisions. Our results indicate that industries with lower overhead costs benefit more significantly from increased capacity allocation, with up to a 25% improvement in profit, compared to a 5–10% improvement in higher overhead industries. Conversely, at full capacity demand rates, increased allocation levels detrimentally affect profit, particularly in industries with higher overhead ratios. The study utilises a 3-way ANOVA to confirm the significance of these findings, revealing that industry type, demand rates, and allocation levels are critical factors in optimising profit. This research highlights the need for a pragmatic approach to capacity allocation that aligns with industry characteristics and demand levels, steering away from revenue maximisation to a more holistic view of profitability that includes overhead cost management.

KEYWORDS:

• SDG 9: Industry
• innovation and infrastructure
• capacity allocation
• order management
• manufacturing overhead costs
• production capacity

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are available with a subscription in IBISWorld at https://www.ibisworld.com/. The derived data supporting the findings of this study are available from the corresponding author upon request.

Additional information

Notes on contributors

Rajesh Srivastava

Rajesh Srivastava, Ph.D., Rajesh Srivastava is professor of Supply Chain Management in the Lutgert College of Business, Florida Gulf Coast University (FGCU). He is the chair of the Information Systems, Analytics, and Supply Chain Department. He also serves as the Director of the Center for Supply Chain Excellence at Florida Gulf Coast University. He received his Ph.D. in Business Administration from The Ohio State University. His research interests include various issues in supply chains and closed loop supply chains. He has published papers in several journals such as International Journal of Production Research, European Journal of Operational Research, Journal of Operations Management, Decision Sciences, International Journal of Production Economics, Omega, Production Planning and Control, Transportation Research, and Journal of the Operational Research Society among others.

Elias Kirche

Elias T. Kirche, Ph.D., Elias T. Kirche is associate professor of Supply Chain Management in the department of Information Systems, Analytics and Supply Chain at Lutgert College of Business, Florida Gulf Coast University, USA. He received his Ph.D. in Operations Management from the University of Houston and has published in various research areas of supply chain management, logistics, information systems and business analytics. His current research interests focus on the development of data-driven decision models for operations planning and resource allocation, as well as the improvement of healthcare operations. He collaborates extensively with industry partners to address the challenges in supply chain operations.