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136 CHAPTER 4 • CAPACiTy sTRATEgy

Figure 4.7 some factors influencing the timing of capacity change

Lead-time Forecast level
of capacity of demand
Ability to change
cope with Competitor
change activity

Timing of
OPERATIONS MARKET
RESOURCES capacity REQUIREMENTS
change

Economies Uncertainty of
of scale future demand
Required level
of service

demand warrants it, just to pre-empt a competitor getting in first. The economics of the
investment may even mean that whoever expands their capacity first renders capacity
expansion by any other operation uneconomic. Figure 4.7 illustrates the factors that
influence the timing decision.

generic timing strategies
There are three generic strategies for timing capacity change:
1 Capacity leads demand – timing the introduction of capacity in such a way that
there is always sufficient capacity to meet forecast demand.
2 Capacity lags demand – timing the introduction of capacity so that demand is always
equal to or greater than capacity.
3 Smoothing with inventories – timing the introduction of capacity so that current
capacity plus accumulated inventory can always supply demand.
For example, Figure 4.8 shows the forecast demand for an air conditioning company
that has decided to build 400-unit/week capacity plants to meet the growth in demand.
Figure 4.8(a) illustrates capacity leading and lagging strategies, while Figure 4.8(b) illus-
trates the ‘smoothing with inventories’ strategy. Each strategy has its own advantages
and disadvantages. These are shown in Table 4.3. The actual approach taken by any
company will depend on how it views these advantages and disadvantages. For exam-
ple, if the company’s access to funds for capital expenditure is limited, it is likely to find
the delayed capital expenditure requirement of the capacity-lagging strategy relatively
attractive.
Pure leading and pure lagging strategies can be implemented so that no invento-
ries are accumulated. All demand in one period is satisfied (or not) by the activity of
the operation in the same period. For a customer-processing operation there is no

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