Page 156 - Operations Strategy

the overall level oF operatIons CapaCIty 131
As the size of the operation increases it becomes possible eventually to replace the
capacity that has been built up incrementally over time with new, larger and more inte-
grated units. This may allow two further economies of scale. The first comes through
the increases in operations efficiency that can be gained by integrating, or combining,
the processes established separately over time. So, for example, each increase of capac-
ity may have included a particular kind of machine that could be replaced by a larger,
more efficient machine once total capacity exceeds a certain level. Second, the capital
costs of building operations do not increase proportionally to their capacity. The reason
for this is that whereas the capacities of many types of facilities and equipment that go
into an operation are related to their volume (a cubic function), the capital cost of the
facilities and equipment are related to its surface area (a square function). Generally, the
cost (C ) of providing capacity in one increment of size y is given as follows:
y
C = Ky k
y
where K is a constant scale factor and k is a factor that indicates the degree of economies
of scale for the technology involved (usually between 0.5 and 1.0).
There may, however, be significant diseconomies of scale as the size of one site
increases. The most significant of these are related to the complexity inherent in a
large operation. As organisations grow larger they may become more unwieldy and
need a greater degree of planning and coordination. More activities are needed just to
keep the organisation operating, and more staff are needed to manage the extra sup-
port processes. All this not only adds cost, it can make the whole operation incapable
of responding to changes in customer demands. Very large operations find it difficult to
be flexible because even if they can sense changes in the markets, they may not be able
to respond to them. As operations grow, communication also becomes more complex,
which in turn provides more opportunities for miscommunication and errors.

example vinyl’s comeback poses capacity problems 4
When a new technology replaces the old, sales decline, the companies that cling to the old
technology struggle and eventually close, and the once busy processing plant is scrapped. But
what happens when, against all expectations, the old technology starts to get popular again? It
is called ‘technology re-emergence’, and has happened with fountain pens and Swiss mechani-
cal watches; and it is happening with vinyl records. Over two decades after the widely predicted
death of vinyl records (lowest sales were in 2004), sales had climbed in UK and US markets to be
more than ten times those of a few years earlier. Although vinyl sales are still dwarfed by digital
formats, its resurrection caused real capacity problems for the few remaining vinyl pressing
plants. As demand built up, most of them struggled to cope. New record-pressing machinery
was never cheap and now was in very short supply. Record-plant operators scoured the world
for discarded or mothballed presses, paying record prices for them and then having to refurbish
them at even greater cost. One American operator was delighted when they unexpectedly dis-
covered 13 forgotten presses in a Chicago warehouse. It allowed them to double their capacity
to become one of America’s largest vinyl factories.
Even so, capacity could not meet demand and greater volumes were forced through ageing,
and not always reliable, machines in those few plants with working presses. Nor was it just
the pressing machines that were in short supply. Part of the bottleneck was also due to the

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