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and outdated machinery.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.
Flexible Capacity
Three elements of manufacturing flexibility
determine the capacity of a plant. They are.
Product Mix: Many manufacturing organisations
are concerned with providing customers a wide range of products
to choose from. When the mix of products is small, capacity
can easily be decided. However, as the product mix increases,
decisions on capacity can become complex. Some organisations
decide on manufacturing certain products and sourcing the
rest from other suppliers. Few other manufacturers centre
their manufacturing plant on certain activities and works,
and outsource the rest. Of course there are organisations
that do every thing in house and some others who outsource
everything and merely act as intermediaries. Each of these
decisions naturally have a bearing on the plant's capacity.
Product Volume: Manufacturing organisations
face fluctuations in demand volume. These fluctuations could
be seasonal, or due to market forces or the life cycle of
the product. Seasonal fluctuations in demand can be considerable
in some industries. With a proper study of the industry,
manufacturing organisations can work out capacity to take
care of seasonal fluctuations. The demand fluctuations due
to market forces can be unique and unpredictable. Market
forces like competition, new substitutes and so on.
The demand for a basic product and its different
versions can vary to a great degree over its life cycle.
Matters concerning demand variation for a version of a product
will impact certain machines and processes. When it is the
question of change in demand for a basic product over the
life cycle, then decisions can impact entire plant. .
Other Considerations: Certain manufacturing
organisations tend to create huge capacities with the aim
of creating an entry barrier for new players. With the huge
capacity, the organisation can manufacture at very low prices
which other players will find difficult to match. This huge
capacity can however become an exit barrier. With massive
investments, the manufacturing organisations can create
barriers to moving out of the present activity. Though demand
is declining, organisations will continue with the existing
capacity, as they might not be able to use the current equipment
or plant for any other purpose. This is truer for those
organisations whose capacity is located in one plant. For
organisations having capacity that is distributed across
various plants geographically, it is a little easier to
scale down.
Demand and Capacity
Decisions on capacity have a long -term influence.
Where Capital investments can be very high, demand fluctuations
can result in serious problems for the organisation. Building
a large capacity could be financially risky. Not having
capacity to cater to customer demand could be equally problematic.
Globalisation has in fact added to the lack
of certainty about the available capacity of an industry.
Which player is going to emerge in which country and with
what capacity is now highly unpredictable. Especially in
industries where the level of technology is not high, new
players keep emerging trying to cater to the existing demand.
While new investments are being made, the older players
are not willing to reduce capacity. As long as demand is
sufficient things are fine. The moment the economy goes
down resulting in a slump, the players begin their struggle
to survive. This can cause a spiralling price fall, which
may not be good for any one. Capacity decisions can have
political repercussions. Previously, capacity adjustments
in industry took place naturally with changes in demand.
Now however, with globalisation, WTO, and several countries
coming together with trade cooperation, the manufacturing
operations of organisations have become huge. Therefore,
any decision that the organisation may want to take regarding
capacity like shutting down a plant or shifting operations
are becoming international news. In some cases the opening
and shutting down of plants even change the political fortunes
of various political parties.
Close cooperation between the marketing and
manufacturing department is required for managing fluctuating
demand. Under utilisation or facing a short fall in capacity
is not just an issue of concern for the manufacturing department
but for the entire organisation. Both these situations result
in losses. Therefore, the entire organisation should work
closely to overcome the problem. Marketing department can
assist the manufacturing department to manage demand better.
It can help the manufacturing department to make the demand
more predictable and even. This in turn helps the manufacturing
to be realistically paced and allow better capacity utilisation.
Some ways that the marketing department can do this is by:
Forecasting Mistakes
Often expected demand has its foundation in
projections and could be mistaken. These projections have
their roots in past data. On the basis of the past sales
growth in the industry or the enquiries received, manufacturing
organisations predict future demand. These projections can
sometimes go wrong. When there is a short supply, a potential
customer may go to ten different vendors to enquire if a
product is available. Only one of those vendors may finally
get that order. The other nine on the other hand may have
used this enquiry as an indication of demand. In such cases,
the total expected market demand might seem to grow exponentially
This is especially true in markets where customers have
been turned down due non- availability of a product. Another
common reason for wrong forecast is magnification of expected
demand as it moves down the value chain. A vendor might
be sourcing from three different suppliers who in turn are
sourcing from a number of other suppliers. In such a case
when the vendor projects a certain demand, all the suppliers
expecting the entire order to come to them will project
the same order to their suppliers. As a result the levels
in the value chain increase and consequently the total expected
market demand also gets magnified. Steel industry for instance
is prone to such wrong projections.
Flawed Reasons For
Increasing Capacity
Manufacturing organisations may increase the
capacity or procure new equipment with an aim to reduce
delivery times, provide a wider choice of product, or give
better quality products. This is okay. However often manufacturing
organisations are found increasing capacity thinking that
it will help increase labour productivity. This is a flawed
assumption. Though the labour productivity might rise to
some extent, it may not be sufficient to get a return on
the money invested in the new equipment and facility. Also
any improvements in productivity per labourer is often neutralised
by the expenditure on support and administrative staff.
The same follows with the assumption that
more capacity will help reduce the manufacturing costs per
product. While this may be true, it would be a better option
to try improving the present operations to increase efficiency
and reduce costs. Trying to increase labour productivity
or decrease cost per product by investing in additional
capacity can thus be a wrong approach.
Different Approaches
to Investment in Capacity
There are three basic approaches adopted by
manufacturing organisations while making investment in capacity.
They are
Risk Approach: In this approach a manufacturing
organisation will invest in a large capacity even before
there are any tangible indications of the existence of demand
to feed the capacity. However, manufacturing organisations
may take this risk with the view of meeting customer requirements
in a consistent manner and providing better and faster service
in periods of high demand. This being possible as the manufacturing
organisation has a built in capacity capable of matching
any steep rise in demand. The organisation proposes to attract
and retain a larger customer share through its faster and
more efficient services. It seeks to grow market by attracting
customers from competitors when they are unable to meet
increased customer demand. In such a case the customer will
search for a manufacturer who can supply the product. Once
he finds the manufacturer who can supply a product consistently,
he will continue to purchase from that manufacturer in future.
Thus, the manufacturer can slowly capture and retain a larger
marker share.
This strategy can however backfire. In cases
where the cost of investment is high, the customer demand
should be sufficient enough for a recovery in the investment.
If the demand is not high enough, the manufacturing organisation
may have to charge a higher price from the customer in order
to meet his fixed costs. This can make the customer wait
for supply from other manufacturers and only opt to purchase
from the manufacturer with greater capacity in times of
urgency. Many organisations are often willing to risk building
capacity without any concrete indications of demand. This
approach is successful, where the non-availability of a
product even for a short time can greatly inconvenience
the customer. Essential drugs is one product where a consistent
ability to deliver products is seen as a great advantage.
The manufacturer can even charge a premium for being able
to supply products in any situation.
Balanced Approach: In this approach,
a manufacturing organisation may alternatively be found
with excess capacity or under capacity. The strategy is
to build inventory when it is has an excess of capacity
and to use up this inventory when the demand grows more
than what the manufacturing capacity can supply. If the
demand persists higher than the existing capacity the manufacturer
will again invest in a capacity that is greater than the
current demand. This approach is suitable where the products
have a long shelf life, do not cost much to hold as inventory
and when it does not take long to significantly raise the
capacity. In situations where it takes longer to increase
manufacturing capacity, the organisation can make some temporary
adjustments like getting work done through overtime, add
shifts or outsource to a third party.
Conservative Approach: Organisations
that are averse to taking any risks in terms of capital
investment follow the conservative approach. The manufacturing
organisation is willing to make capital investment only
after being sure that there is enough demand for it to recover
the costs incurred. Meanwhile, it is willing to turn down
customers due to insufficient capacity. This strategy is
useful where the customers for a particular manufacturer
are willing to wait for the supply of the product. This
is possible in the absence of suitable alternatives in the
market. For example, certain customers who are attached
to a particular deodorant will be willing to come back for
the deodorant once it is available in the market.
Benefits of Scale
There are certain undeniable benefits associated
with large capacities. In volume based chemical manufacturing
industries, for instance, increasing the capacity of a container
two times will result in a three time larger output. The
cost of adding capacity decreases with greater capacity.
The greater the capacity the lesser is the cost of operating
the plant. However, the benefits accrued due to increasing
the size of the plant is typically dependent on capital
investment. It is better to increase the plant's capacity
by constantly improving its efficiency than by increasing
the size of the plant
Approaches To Increasing Capacity of
Equipment
Ideally, increase in capacity of the plant
should be in proportion to the increase on demand. However,
this is not always possible. Hence, it is more practical
to increase the capacity in small steps, keeping pace with
demand. Increasing capacity in large chunks is likely to
result in under utilisation for some time at least. It will
also require huge capital investment to increase capacity
in large chunks. In industries where a particular facility
is required to be used by various units in the plant, increasing
capacity of that facility can create conflict of demand.
For instance, a furnace in a plant, may be required by various
units of the plant. Now having one large furnace would mean
that other units wait when one unit is using the furnace.
This delays the production in other units. Also, once a
unit finishes its use, the furnace has to be set up for
the use of next unit. This adds to the delay. Instead it
is better to have small furnaces for each unit. This will
reduce the effects of a conflict of demand for a particular
facility. Of course, having several small facilities will
incur larger operational and labour costs.
However, increasing capacity in small steps
is being preferred because:
