Manufacturing Capacity

When manufacturing organisations are making key decisions regarding manufacturing facilities the important aspect that comes to mind is capacity. Capacity has technological, structural, economic and strategic connotations. To a certain extent manufacturing capacity also decides the nature and purpose of a business unit.

Manufacturing organisations seek the growth of their business units. They seek a growth in the overall market and in their respective market share. The drive to grow is strong. This is because greater the size of market share in terms of volumes, greater is the profits for the organisation. Thus, in terms of business, growth is always looked on with favour. However, in terms manufacturing there are some difficulties. Increase in manufacturing capacity brings with it greater costs, greater complications, and need for better management. At the same time insufficient manufacturing capacity can result in turning down orders which could lead to customer dissatisfaction. Insufficient capacity also results in over stretching of present equipment and labour leading to other problems. Organisations need to be aware of the reality of declining demand too. Because of its importance, organisations should be able to integrate business, growth and capacity planning for its own long-term health.

Miscalculations In Capacity

Different marketplaces, situations and product life stages demand different kind of strategic planning and responses. Most often decisions of strategic importance are taken on the basis of assumptions. It is the same with capacity planning. The greatest business losses are often due to miscalculations related to manufacturing capacity. Some of the miscalculations in manufacturing capacity could be.

Managing Capacity

All manufacturing organisations face problems related to capacity. Each of them has to work out ways to tackle those problems. The solutions worked out have to be in line with the organisations basic strategy. Some of the ways that manufacturing organisations can manage capacity are:

Standardising: If the goods are all standard, then the organisation can probably produce to stock in times of low demand to offset manufacturing capacity requirements in times of high demand. The same principle can be followed if the standardisation is up to a certain level of the production in the products. For manufacturing organisations that are making custom built products, design should focus on incorporating as much standard parts as possible. With the help of standardisation manufacturing organisations can offset capacity requirements in periods of high demand by building inventory in times of low demand. Though this goes contrary to the popular Just-In-time inventory system, many manufacturing organisation are applying this principle to efficiently manage capacity.

Temporary Adjustments: Organisations can to a certain extent manage excess production demand without making more capital investment. Adding more shifts like second and third shift based on the demand is one of the ways of doing it. For temporary spurts in demand organisations can also try to get the job done by running overtime or working on normal holidays. Another way is to outsource work to sub contractors to offset demand load on the plant. These solutions however, have their related problems like

Refusing Orders: Organisations find it very difficult to say no to an additional order from a customer even when they know they cannot fulfil it. This goes against the organisation's common business stand.

While trying to overreach is good to an extent it always has its problems. Sometimes it may be better in the long term to refuse an order. It is much better to refuse a customer at the time of order and explain to him the reasons, than to take up an order and then let him know that the order could not be fulfilled after a period of time.Failing to fulfil an order committed to, can result in gaining a bad reputation and loss of good will in the market. The customer could also file a case against the organisation for failing to keep a commitment.

Capacity Planning And Product Life Cycle

Capacity requirements are closely linked to the stage in the life cycle the product manufactured is in. Hence it is necessary to study the product's life cycle stage to come out with appropriate projections and future manufacturing capacity requirements. Failing to do so may result in an organisation getting stuck with excess capacity and outdated machinery. The stages in a product's life cycle are

Product Introduction Phase: During this stage when a new product has been developed and introduced in a market, the demand is still very fluid. At this stage the total size of the market and the company's market share cannot be gauged. Hence, organisations should not presumptuously invest in a high level of manufacturing capacity. Apart from this the industry will also find newer and better methods of production coming up quickly during this early stage. Therefore, organisations should be careful not to make large or significant investments in a particular technology or process.

Growing Phase: Once a product's market enters the growth phase it may experience varying degrees of quick growth, depending on the Industry. The rate at which an organisation's market share grows may differ from the industry rate based on the business strategy adopted by the organisation.

Organisations wanting to gain market through the lower price factor, should consider making large-scale investment to increase manufacturing capacity. However, the organisations should also consider the possibility of other players and competitors too investing to increase manufacturing capacity. If this happens beyond an extent it may lead to the problem of overcapacity in the industry. Overcapacity in industry can lead to unhealthy and mutually destructive competition, not good for any one. This happens more in industries where the capital investment involved in increasing manufacturing capacity is very high. The race for increasing more manufacturing capacity, generally happens between competing organisations seeking to out do each other to fill a gap in the demand and supply of market. In such situations, organisations do not want to lose out on increasing market share. What they fail to consider is the consequences of being stuck with high investments with no means of any returns.

Some organisations on the other hand try to compete on the non-price attribute of the product. Such organisations will most often invest in technology and process to make differentiation their competitive advantage. These organisations will invest in increasing their manufacturing capacity to a certain extent, but are often willing to forgo a large market share in order to benefit more through larger profit margins.

Plateau phase: In the plateau or market maturity phase the size of market starts to become constant with no considerable growth. Once this phase is reached, organisations tend to have a stable market share, all things kept constant. At this stage, organisations increase profitability by reducing costs and utilising available manufacturing capacity to the maximum. However, there is the possibility of some organisations trying to increase profitability by increasing manufacturing capacity! The strategy is to increase manufacturing capacity, which results in reducing costs resulting in lower pricing which in turn helps gain market share. The increase in manufacturing capacity in the plateau or maturity phase however, is most often in small amounts than in large degrees.

Shrinking Phase: Every product reaches a stage where the demand for it starts to fall. This is because the market has found better alternatives to meet the particular need or want. At this stage manufacturers are faced with falling demand and under utilisation of manufacturing capacity. Ideally, the organisation should sell or close down the extra manufacturing capacity and shift to a lower manufacturing capacity gear. However, this does not always happen in most industries. In many cases the manufacturing capacity gets transferred to places having lower labour costs resulting in products being made cheaper. The lowering of costs can result in a improvement of market for the product to some extent. In other cases new players may be found entering the market with improved technology and processes resulting in a shakeout and restructuring of market.

Locating Capacity

While the amount of manufacturing capacity to be built in the organisation is an important consideration, another equally important consideration is the location of the manufacturing facility. Some issues related to the location of manufacturing facilities are

Presence of appropriate labour: The location of a manufacturing facility is dependent on the skill set required for doing the work and availability of personnel with those skill set. It may be found that some regions are having an abundance of appropriate labour while others have none at all. The availability of appropriate and low cost labour is a very important element in being competitive. It therefore plays an important role in the location of the manufacturing facility.

One Large or many small: There are many aspects that make organisations decide to centralise or disperse their manufacturing facilities. While centralising, the entire manufacturing operations can reduce 'manufacturing' costs. It can also result in higher 'distribution' costs, especially if the product caters to a geographically distributed market. Large manufacturing facilities may also result in powerful unions being formed, which could result in greater bargaining power of employees and thus increasing the cost of manufacturing . Large manufacturing facilities tend to be less flexible and responsive to market changes.

Apart from these reasons, organisations may consider distributing their manufacturing facilities geographically to get access to certain markets, which would otherwise be closed due to political or governmental reasons. For instance, certain countries may require the organisation to locate their manufacturing facilities within their country to sell their products there.

Availability of resources: Manufacturing of a product requires certain resources like energy, water basic infrastructure and so on. Hence, manufacturing organisations will try to locate their facilities in places where these basic resources are available and available cheaper compared to other places.

In house or Outsource: Organisations can either undertake the entire manufacturing operations of the business it is involved in or outsource a part of it and focus on the core areas of manufacturing where it can add value. While organisations may feel that by undertaking all the production in- house they can earn more without having to share profits with suppliers, it may not actually be true. Outsourcing work to other suppliers may help the organisation to be flexible and become more focused. A supplier might also manufacture a component better and at a lower cost, thus saving costs for the organisation. Also, organisations can turn to new suppliers for new products and new changes in the manufacturing without incurring major costs. This would not be possible if everything is made in-house.

It is generally found that most manufacturing organisations outsource 50 to 70 % of their total manufacturing in terms of raw materials and semi finished components. Therefore manufacturers need to consider the proximity of important suppliers to their manufacturing site. Physical proximity of suppliers plays a large part in efficient manufacturing and supply chain operations. There are some manufacturing organisations like Toyota and Dell that are large enough to attract suppliers to locate near to them. However the other smaller organisations will have to seriously consider availability of suppliers when setting up their plant.

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