Page 147 - Operations Strategy

122 CHAPTER 4 • CAPACiTy sTRATEgy

What is capacity strategy?

An operation’s capacity dictates its potential level of productive activity. It is ‘the maxi-
mum level of value-added activity over a period of time that the operation can achieve under
normal conditions’. Operations strategy is the set of decisions concerned with how
operations configure and change their overall capacity in order to achieve a particular
level of output potential. Note that capacity is not the same as output. Demand may
not be sufficient to warrant an operation producing at full capacity, and in many high
customer-contact operations, such as theatres, ‘output’ (i.e. the number of customers
entertained) cannot normally exceed demand.
The capacity strategy of an operation defines its overall scale, the number and size of
different sites between which its capacity is distributed, the specific activities allocated
to each site and the location of each site. All these decisions are related. For example,
an air conditioning servicing operation will have sites with relatively small individual
capacity if it chooses to have many sites located no more than 30 minutes’ travelling
time from any customer. If it relaxed this ‘response time’ to 60 minutes, it could have
fewer, larger sites. Together, these decisions determine the configuration of an opera-
tion’s capacity, its overall shape, size and deployment. An appropriate configuration
of capacity for one set of products or services, and pattern of demand, will not neces-
sarily be appropriate for another. So when the nature of competition shifts in some
way, companies often need to reconfigure their capacity. This process of changing (or
reconfiguring) capacity is also part of capacity strategy. It usually involves deciding
when capacity levels should be changed (up or down), how big each change step should
be and overall how fast capacity levels should change.

Capacity at three levels

The provision of capacity is not just a strategic issue. It takes place in all operations min-
ute by minute, day by day and month on month. Every time an operations manager
moves a staff member from one part of the operation to another, he or she is adjusting
capacity within the operation. Similarly, when setting shift patterns to determine work-
ing hours, effective capacity is being set. Neither of these decisions is strategic – they do
not necessarily impact directly on the long-term physical scale of the operation. But shift
patterns will be set within the constraints of the physical limits of the operation, and the
minute-by-minute deployment of staff will take place within the constraints of the num-
ber and skills of the people present within the operation at any time. Thus, although
capacity decisions are taken for different time-scales and spanning different areas of the
operation, each level of capacity decision is made with the constraints of a higher level.
Table 4.1 illustrates this idea. Note, though, that the three levels of capacity decision
used here are, to some extent, arbitrary and there is, in practice, overlap between the
levels. Also, the actual time-scales of the three levels will vary between industries.

the overall level of operations capacity

The first capacity-related decision faced by any operation is ‘How much capacity should
we have?’ or, put simply, ‘How big should we be?’ It sounds a straightforward ques-
tion, but is in fact influenced by several factors particular to each operation and its

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