Page 594 - Introduction to Business

568 PART 6 Managing Business Operations, Management Information Systems, and the Digital Enterprise

EXHIBIT 16.4 In simple terms, capacity is the capability of the production system measured
in units of input or output per unit time. When the product line is relatively homo-
Basic Strategies for Capacity
Increases geneous, units of output per unit time are used to express capacity. For example,
DaimlerChrysler could measure the capacity of one of its
First Strategy: Lead Demand plants by the number of vehicles that can be assembled in
a week, and Sony could measure the capacity of one of its
manufacturing shops by the number of televisions that can
be produced in a day. When the product line is diverse,
units of input are preferred. For example, the capacity of a
Volume Capacity hospital can be measured by the number of beds, the
capacity of a restaurant by the number of tables, and the
Demand capacity of a hotel by the number of rooms.
Capacity can be added in response to demand in-
creases and decreases according to three basic strategies:
lead demand, match demand, and lag demand. Exhibit
16.4 illustrates the three basic strategies when demand is
Time
increasing at a steady pace.
Second Strategy: Match Demand
Lead demand strategy. The company uses capacity to keep
its market share, as a weapon to prevent expansion from
competitors, or to steal customers from capacity-
constrained competitors. This is an aggressive but risky
strategy.
Volume Capacity Demand Match demand strategy. The firm settles for a balance
between risk and return. Capacity is only increased to
keep up with demand.
Lag demand strategy. The company uses a conservative
wait-and-see approach. It is only when the increases in
demand have materialized that capacity is added. While
Time this is a low-risk strategy, it could also lead to reductions
in market share.
Third Strategy: Lag Demand
A widely used tool in capacity decisions is a decision tree.
To illustrate the use of the decision tree, consider a company
that is planning to launch a new product, but is unsure of
the market response. The demand for the new product
could be high, medium, or low. A marketing study indicates
Volume Demand that the probability of high demand is .3, the probability of
medium demand is .5, and the probability of low demand
is .2. The company can design the production system to
Capacity
have enough capacity to satisfy the high demand level, the
medium demand level, or the low demand level. We will
respectively refer to these designs as the high-capacity,
Time medium-capacity, and low-capacity designs. A financial
study has been conducted to evaluate the profitability of the different demand-
capacity combinations. The results of the study are presented in Exhibit 16.5.
With the high-capacity design and high-demand scenario, the company would
get a profit of $250,000. With the high-capacity design and low-demand scenario,
capacity The capability of the the company would experience a loss of $35,000. Should the company design the
production system measured in units of production system for high, medium, or low capacity? This capacity design deci-
input or output per unit time
sion can be represented as the decision tree in Exhibit 16.6.
lead demand strategy A strategy where
capacity is increased before demand Each capacity design option is represented by a tree branch; the square repre-
increases sents the decision point; and the nodes represent the randomness in the demand

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