Capacity Management Strategies

There are three basic capacity strategies used by different organizations when they consider increased demand; lead capacity strategy, lag capacity strategy, and the match capacity strategy.

Lead Capacity Strategy

As the name suggests, the lead capacity strategy adds capacity before the demand actually occurs.

Companies often use this capacity strategy, as it allows a company to ramp up production at a time when the demands on the manufacturing plant are not so great. If any issues occur during the ramp up process, these can be dealt with so that when the demand occurs the manufacturing plant will be ready.

Companies like this approach as it minimizes risk. As customer satisfaction becomes an increasingly important, businesses do not want to fail to meet delivery dates due to lack of capacity. Another advantage of the lead capacity strategy is that it gives companies a competitive advantage. For example, if a toy manufacturer believes a certain item will be a popular seller for the Christmas period, it will increase capacity prior to the anticipated demand so that it has product in stock while other manufacturers would be playing “catch up.”

However, the lead capacity strategy does have some risk. If the demand does not materialize then the company could quickly find themselves with unwanted inventory as well as the expenditure of ramping up capacity unnecessarily.

Lag Capacity Strategy

This is the opposite of the lead capacity strategy. With the lag capacity strategy, the company will ramp up capacity only after the demand has occurred. Although many companies follow this strategy success is not allows guaranteed. However, there are some advantages of this method. Initially, it reduces a company’s risk. By not investing at a time of lesser demand and delaying any significant capital expenditure, the company will enjoy a more stable relationship with their bank and investors.

Secondly, the company will continue to be more profitable than companies who have made the investment with increased capacity. Of course, the downside is that the company would have a period where the product was unavailable until the capacity was finally increased.

Match Capacity Strategy

The match capacity strategy is one where a company tries to increase capacity in smaller increments to coincide with the increases in volume. Although this method tries to minimize the over and under capacity of the other two methods, companies also get the worst of the two, where they can find themselves over capacity and under capacity at different periods.

Capacity management strategies can be discussed under two major heads:

• Short-term response
• Long -term response

Short term strategies

In short term periods of up to one year, fundamental capacity is fixed. Major facilities are seldom opened or closed on a regular monthly or yearly basis. Many short term adjustments for increasing or decreasing capacity are possible, however. Which adjustment to make depend on whether the conversion process is labor or capital intensive and whether the product is one that can be stored in inventory

Capital intensive processes rely heavily on physical facilities, plant, and equipment. Short term capacity can be modified by operating these facilities more or less intensively than normal. The cost of setting up, changing over and maintaining facilities, procuring raw materials and managing inventory, and scheduling can all be modified by such capacity changes. In labor intensive processes, the short term capacity can be changed by lying off or hiring people or having employees overtime or be idle. These alternatives expensive, though since hiring costs, severance pay, or premium wages may have to be paid, the scarce human skills may be lost permanently.

Strategies for changing capacity also depend upon long the product can be stored in inventory. For products that are perishable (raw food) or subject to radical style changes, storing in inventory may not feasible. This is also true for many service organizations offering such products as insurance protection, emergency operations (fire, police etc,) and taxi and barber services. Instead of storing outputs in inventory, inputs can be expanded or shrunk temporarily in anticipation of demand.

Long term Responses

Capacity expansion strategies- capacity expansion adds capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization. It focuses on growth of the Organization by enabling it to increase the flow of its products in the industry. Capacity expansion is a very significant decision; the strategic issue is how to add capacity while avoiding industry overcapacity. Overbuilding of capacity has plagued many industries e.g. paper, aluminum and many chemical businesses. The accountants’ or financial procedure for deciding on capacity expansion is straightforward. However two types of expectations are crucial:

• Those about future demand,
• Those about competitors behavior

With known future demand, organizations will compete to get the capacity on stream to supply that demand, and perhaps preempt such action from others.

• Horizontal and vertical integration: Horizontal and vertical integration add capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization
• Horizontal Integration: Horizontal integration is the growth of a company at the same stage of value chain. Horizontal integration consists of procuring (related companies, products or processes) the company could start related business within the firm, which would be an example of internal concentric diversification.
• Vertical Integration: Vertical integration is the combination of economic processes within the confines of a single organization. It reflects the decision the decision of the firm to utilize internal transaction rather than market transaction to accomplish its economic purpose. It is expressed by acquisition of a company either further down the supply chain, or further up the supply chain, or both.
• Backward Integration: In case of backward integration, it is critical that the volumes of purchases of the organization are large enough to support an in-house supplying unit, If the volume of through puts is sufficient to set up capacities with economies of scale, organization will reap benefits in production, sales purchasing and other areas.
• Takeover or Acquisitions: Takeover or acquisition is a popular strategic alternative to accelerate growth. Major companies which have been taken over post liberalization period include Shaw Wallace, Ashok Leyland, Dunlop, etc. Acquisition can either be for value creation or value capture.

Baselining

Baselining is a method for analyzing performance. The method is marked by comparing current performance to a historical metric, or “baseline”. For example, a measured performance of a network switch over a period of time could be used as a comparative baseline (often called a utilization profile) and if some configuration change is made to the switch. Baselining is useful for many performance management tasks, including

• Monitoring performance
• Measuring trends
• Assessing whether performance is meeting requirements laid out in a service agreement

Baselining is broad term for any analysis method that compares changes in actual data against a baseline. The most common use of baselining is as a tool in performance management for trending analysis–comparing a performance metric to a historical value to find a trend that can be used to estimate future performance or needs. Another common use of baselining is in managing SLAs or service-provider agreements . In these cases actual performance is measured against the baseline of an agreed minimum service level. A third use of baselining is for monitoring health (watching for changes in problem indicators), which is a proactive form of fault management. Although these three uses of baselining have quite different objectives, the principles (and tools used) are very similar.