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18/08/2016 10:25:24 PM

Some considerations in changing capacity

·        Maintaining System Balance

There are various ways of dealing with imbalance.

-        One is to add capacity to stages that are bottlenecks. This can be done by temporary measures such as scheduling overtime, leasing equipment, or purchasing additional capacity through subcontracting.

-        A second way is through the use of buffer inventories in front of the bottleneck stage to ensure that it always has something to work on.

-        A third approach involves duplicating the facilities of one department on which another is dependent.

All these approaches are increasingly being applied to supply chain design. This supply planning also helps reduce imbalances for supplier partners and customers.

·        Frequency of Capacity Additions

There are two types of costs to consider when adding capacity: the cost of upgrading too frequently and that of upgrading too infrequently. 

-        Upgrading   capacity   too   frequently   is   expensive.   Direct   costs   include removing and replacing old equipment and training employees on the new equipment. In addition, the new equipment must be purchased, often for considerably more than the selling price of the old. Finally, there is the opportunity cost of idling the plant or service site during the hangover period.

-        Upgrading capacity too infrequentlyis also expensive. Infrequent expansion means that capacity is purchased in larger chunks. Any excess capacity that is purchased must be carried as overhead until it is utilized. Exhibit 3.2 illustrates frequent versus infrequent capacity expansion.)

·        External Sources of Operations and Supply Capacity

In some cases, it may be cheaper to not add capacity at all, but rather to use some existing external source of capacity. Two common strategies used by organizations are outsourcing and sharing capacity.

Examples:

+        Dell Computer using a Chinese company to assemble their notebook computers. (Outsourcing).

+        Two domestic airlines flying different routes with different seasonal demands exchanging aircraft when one’s routes are heavily used and the other’s are not. (Sharing capacity)

·        Decreasing Capacity

Although we normally think in terms of expansions, shedding capacity in response to decreased demand can create significant problems for a firm. Temporary strategies such as scheduling fewer hours or scheduling an extended shutdown period are often used. More permanent reductions in capacity would typically require the sale of equipment or possibly even the liquidation of entire facilities.