WHAT IS Production Gap

The production gap is an economic analytical term denoting the difference between actual industrial production from its perceived potential production. People generally calculate the production gap as the percentage deviation between the domestic industrial production and its expected production.

BREAKING DOWN Production Gap

A production gap measurement can be used in conjunction with gaps in gross domestic product (GDP) and unemployment to analyze the economy at large. Discrepancies between the three gaps may indicate temporal economic factors that lie outside the norm.

An example of a company-specific production gap is the case of a Ford Motor Company snafu in 2018. That year, the Ford Motor Company suffered a fire at a supplier and halted production of its popular F-150 and Super Duty pickups. This is likely to lead to plateauing sales in the North American market, which upsets current investors and deters potential investors. Ford sidelined F-150 production at its Kansas City plant as well as Super Duty production at both Ohio Assembly its and Kentucky Truck plants. In the Motley Fool's reporting on the subject, they suggest Ford might be able to make up some of the production gap by shortening the usual production shutdown period during the summer. The Motley Fool coverage also notes that Joseph Amaturo, an analyst at Buck Research, calculated that a two-week production halt for the F-150 could trim as much as $310 million from Ford's second-quarter profits.

The Production Gap and Gap Analysis

Gap analysis involves the comparison of actual performance with potential or desired performance. If a company squanders or mismanages its resources, or doesn't plan sound investments, the firm may very well produce below its potential. A gap analysis identifies areas of improvement through assessment, documentation, and strategic planning to improve company performance close the gap on expected versus actual performance. the difference between a business's requirements and its capabilities. One could perform portfolio analysis and identify the need for new products lines; needs may also emerge as consumer trends shift and respond to market disruptors. In the latter case, a gap emerges between what existing products offer and what the consumer demands. The company must fill that gap to survive and grow. Gap analysis can also identify gaps in the market by comparing forecasted profits to desired profits. In the example above, a gap analysis of the Ford Motor Company takes into account the unexpected external factor that delayed production, the factory fire, and further takes into account Ford's overall long-term performance and assesses the corresponding likelihood of the company being able to overcome the short-term hiccup.

The analysis then suggests actions the company can take to mitigate the damage.