Page 155 - Operations Strategy

130 CHAPTER 4 • CAPACiTy sTRATEgy
vehicle (together with the extra fixed cost it brings) could be purchased now in order to
improve service delivery next month, when it is technically needed, or delayed beyond
next month. This last option may involve taking the risk that any vehicle breakdown
would leave the operation dangerously short of capacity but may yet be preferred if the
operations manager has little faith in next month’s level of demand being sustained.
All these points taken together mean that, as is illustrated in Figure 4.4(b), in practice,
unit cost curves

● are capable of being extended beyond nominal capacity;
● often show increases in cost beyond a certain level of volume; and
● are best represented by a band within which the true cost will lie, rather than a
smooth, clean line.

example Big auto 3

Scale is important in car making, so when Toyota became the first member of the ‘ten million
club’ (a total volume of output in excess of 10 million when all its brands including its affiliates,
Daihatsu and Subaru, were taken into account), the industry knew that a significant milestone
had been passed. Not every automobile company relies on scale of course. Manufacturers of
expensive up-market brands, such as BMW, may sell far fewer cars and yet are successful because
their technical excellence and market desirability command relatively high margins. But for
less expensive cars with lower profit margins, scale is increasingly important. Straightforward
production economies of scale are important, but so are other advantages that volume brings.
Distribution and sales operations also benefit from economies of scale, as do research, design
and other functions. Suppliers respect the bargaining power that scale brings, not just by reduc-
ing the cost of supply, but also to invest in developing new technologies. Similarly, the car
companies themselves will generally be more willing to invest in new technologies if the (often
huge) cost can be spread over more output. High volume also makes it easier to exploit the flex-
ibility of production lines to offer customers a wider product range. So what do mid-scale car
makers do? They do not have the volume of Toyota; nor do they necessarily command the high
margins of luxury brands. Some merge to form a bigger combined group; in 2014 Fiat bought
the 41 per cent of Chrysler that they did not already own. Others do not go all the way to a full
merger but form close partnerships. The French firm Renault and Japan’s Nissan have a long-
standing partnership, even though they have remained separate businesses (but they do share
some platforms and parts). And if a broad partnership is not attractive, otherwise-competing
car makers may collaborate on specific projects or technologies.

The factors that go together to reduce costs as volume increases are often called ‘econo-
mies of scale’. Those that work to increase unit costs for increased output beyond a
certain volume are called ‘diseconomies of scale’. What we have described above are
the economies and diseconomies of scale for a single increment of capacity within an
operation. Yet the same logic can be applied for the whole operation. As more units of
capacity are added, the total fixed costs per unit of potential output tend to decrease.
So, for example, the number of people staffing support services such as maintenance,
supervision, warehousing and so on, is unlikely to double when the capacity of the
whole operation doubles.

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