Page 160 - Operations Strategy

CAPACiTy CHAngE 135

● Is the increase in business that may be gained from a reduction in delivery time from 6.3 days
to 3.8 days likely to compensate for the €9.3 million extra cost of moving to six smaller sites?
● Are either of these alternative positions likely to be superior to its existing profitability?
One final point: in evaluating the sizes and number of sites in any operation it is not just the
increase in profitability that may result from a change in configuration that needs to be con-
sidered, it is whether that increase in profitability is worth the costs of making the change.
Presumably, either option will involve this company in not only capital expenditure, but a great
deal of management effort and disruption to its existing business. It may be that these costs and
risks outweigh any increase in profitability.

Capacity change
Planning changes in capacity levels would be easy if it were not for two characteris-
tics of capacity – lead-time and economies of scale. If capacity could be introduced (or
deleted) with zero delay between the decision to expand (or contract) and the capacity
coming on- (or off-) stream, an operation could wait until demand clearly warranted
the change. The fact that changing capacity takes time means that decisions need to be
made before demand levels are known for sure. So, deciding to change capacity inevita-
bly involves some degree of risk, but so does delaying the decision, because delay may
still mean that capacity is not appropriate to demand. And all this is made even more
problematic because of economies of scale (the tendency for both capital and operating
costs to reduce as the increment of capacity increases). This means that, when chang-
ing capacity levels, there is pressure to make the change big enough to exploit scale
economies. Again, though, this carries risks that demand will not be sufficient for the
capacity to be utilised sufficiently for the scale economies to be realised. Conversely,
changing capacity by too little may mean opportunity risks of tying the operation in
to small, non-economic units of capacity. Put both long lead times and significant
economies of scale together and capacity change decisions become particularly risky.

timing of capacity change

The first decision in changing capacity levels is when to make the change. As with so
many capacity decisions, the forecast level of future demand will be a major influence
on the timing of capacity change. Capacity will be increased, or decreased, when fore-
casts indicate that extra capacity is needed, or current capacity not needed. Forecast-
ing, though, especially with the long-term planning horizons necessary for capacity
planning, is a very uncertain process. Therefore, the degree of confidence an operation
has in its forecasts will likewise influence the timing decision. So will the response of
the market to under- or over-capacity. If competitive conditions dictate fast response
times, then an operation might err on the side of timing capacity change to ensure
over-capacity. Conversely, if customers are willing to wait, or if alternative supplies
can be arranged, then there are fewer risks in under-capacity. Nor is the timing deci-
sion exclusively dictated by customers. Competitor activities and responses may also
prompt capacity change. An operation may choose to invest in capacity even before

M04 Operations Strategy 62492.indd 135 02/03/2017 13:02