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the numBer and sIze oF sItes 133

Figure 4.6 some factors influencing the number and size of sites

Economies Required
of scale service level

Size and
OPERATIONS number MARKET
RESOURCES REQUIREMENTS
of sites

Geographical
Supply distribution
costs
of demand

an operation that is planning to expand its capacity to meet the forecast demand. One
option involves building the whole physical facility (with a larger net cash outflow) but
only equipping it to half its potential physical capacity. Only when demand justifies
it would expenditure be made to fully exploit this capacity. The alternative is to build
a fully equipped facility of half the capacity. A further identical capacity increment
would then be added as required. Although this latter strategy requires a lower initial
cash outflow, it shows a lower cumulative cash flow in the longer term.

the number and size of sites

The decision of how many separate operational sites to have is concerned with where
a business wants to be on the spectrum between many small sites on the one hand and
few large sites on the other. Once again, we can think of this decision as the reconcili-
ation of market factors and resource factors. This is illustrated in Figure 4.6. Separating
capacity into several small units may be necessary if demand for a business’s products
or services is widely distributed. This will be especially true if customers demand high
absolute levels, or immediate service. Of course, dividing capacity into small units may
also increase costs because of the difficulty of exploiting the economies of scale possible
in larger units. A small number of larger units may also be less costly to supply with their
input resources. There again, in material transformation operations, a single large unit
will bear extra transportation costs in supplying its distributed market.

example distribution operation
Suppose a company that stores and distributes books to book shops is considering its capacity
strategy. Currently, in its European market, it has three distribution centres – one in the UK,
one in France and one in Germany. The UK depot looks after the UK and Ireland, the French
depot looks after France, Spain, Portugal and Belgium, and the German depot looks after the
rest of Europe. The company is facing conflicting pressures. On one hand it wants to minimise

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