Page 164 - Operations Strategy

CAPACiTy CHAngE 139
operation where forecast demand is increasing seeks to satisfy all demand by increas-
ing capacity using large capacity increments, it will have substantial amounts of over-
capacity for much of the period when demand is increasing, which results in higher
unit costs. However, if the company uses smaller increments, although there will still be
some over-capacity it will be less than that using large capacity increments. This results
in higher-capacity utilisation and therefore lower costs. Remember, though, that the
larger increments of capacity can be intrinsically more efficient (because of economies
of scale) when they are well utilised. For example, suppose that the air conditioning
unit manufacturer forecasts demand increase over the next three years, as shown in
Figure 4.9(a), to level off at around 2,400 units a week. If the company seeks to satisfy
all demand by building three plants, each of 800 units’ capacity, the company will
have substantial amounts of over-capacity for much of the period when demand is
increasing. Over-capacity means low-capacity utilisation, which in turn means higher
unit costs. If the company builds smaller plants, say 400-unit plants, there will still be
over-capacity but to a lesser extent, which means higher-capacity utilisation and pos-
sible lower costs.

Risks of over-capacity with large capacity increments
The inherent risks of changing capacity using large increments can also be high. For
example, if the rate-of-change of demand unexpectedly slows, the capacity will be only
partly utilised. However, if smaller units of capacity are used the likelihood is that the
forecast error would have been detected in time to delay or cancel the capacity adjust-
ment, leaving demand and capacity in balance. For example, if demand does not reach
2,400 units a week but levels off at 2,000 units a week, the final 800-unit plant will
only be 50 per cent utilised. However, if 400-unit plants are used the likelihood is that
the over-optimistic forecast would have been detected in time. Figure 4.9(b) shows the
consequences of adopting each of the two strategies in this case.

Figure 4.9 (a) Capacity plans for meeting demand using either 800- or 400-unit capacity plants
and (b) smaller-scale capacity increments allow the capacity plan to be adjusted to accommodate
changes in demand

Capacity plan using Capacity plan using
800-unit plants 800-unit plants
Capacity Capacity
2,400 plan using 2,400 plan using
Forecast demand
400-unit Demand 2,000 400-unit Actual demand
Volume (units/week) 1,600 Volume (units/week) 1,600
2,000
plants
plants
1,200
1,200
800
400
400 800

Time Time
(a) (b)

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