Direct and indirect effects of product mix characteristics on capacity management decisions and operating performance

Studies of the performance effects of product mix complexity typically trea t plant capacity utilization and machine scheduling (for example, setup fre quency) as exogenous factors associated with technology choices, economies of scale, and the level of market demand. However, capacity utilization and machine scheduling also reflect tactical operating decisions taken by loca l managers to maximize short-run performance. If managers rationally antici pate a negative relation between performance and product mix complexity, we expect tactical operating decisions to be used to mitigate performance deg radation. Previous empirical studies that ignore this simultaneity provide an incomplete assessment of the performance effects of product mix complexi ty. This paper uses path analysis to examine the combined impact of product mix on capacity management decisions and operating performance in three te xtile manufacturing plants. The results support the hypothesis that product mix acts through capacity management decisions to reduce performance from the level implied by direct effects alone. The evidence also supports the b ehavioral proposition that managers use capacity management decisions strat egically-creating production slack when product mix is anticipated to most affect performance. However, although managers use discretionary capacity m anagement intensively when the product mix is composed of complex, heteroge neous products, they are unable or unwilling to use these decisions to full y offset the performance impact of product mix.