Chrysler Makes Elementary Accounting Mistake

So in this article, the author mentions how Chrysler, in a bid to save money, is shutting down production for a month. Only one slight problem with that idea: what exactly will they be saving?

Now, this whole post will be based on the idea of Throughput Accounting as written up in the book The Goal by Eliyahu M. Goldratt and Jeff Cox. Because of the union contract and other fixed asset costs, what exactly will Chrysler will be saving? Only variable costs. If they shut down, they still have to pay workers - no savings. If they shut down, their buildings go empty, but they still have to pay for taxes - no savings. In essence, all they are saving are electricity (assuming they don't have that contracted as a fixed cost) and the costs of materials (once again, assuming they aren't required to buy a set amount of materials).

While these savings can be considerable, this isn't all it's cracked up to be. In some ways, Chrysler is "spending" money by closing down because they have these plants, all this capacity, that they aren't using. It is just sitting there. If somehow they could rent out the buildings, that would at least offset opportunity costs this plan ignores.

However, that thought assumes that Chrysler would sell the cars that they would be producing during this down time. If the cars can't be sold, then building them costs way too much money, tying cash up in inventory. In terms of throughput accounting, the constraint of the system is probably in the sales department rather than in production. So in reality, this plan is the best Chrysler can do RIGHT NOW, but they would be better off eliminating these plants rather than just closing for a month. In order to truly save money, they would need to eliminate fixed costs, costs such as employees and production capacity.

What shows why Chrysler should enter bankruptcy is that they would probably be better off hosting haunted factory tours rather than building cars. And no, I am not kidding when I make that suggestion. A company shutting down production for an entire month, or more, has no business being in manufacturing. The haunted factory idea was just an idea to help.

Aren't I polite with that? I even offer it for free. Chrysler, you are welcome!