The document discusses several topics related to capacity strategy including: - Issues around capacity levels, number and location of sites, and managing capacity changes. - Factors that influence the overall level of capacity such as demand forecasts, capital availability, and economies of scale. - Questions around who should be involved in decisions regarding number and capacity of sites, site locations, and task allocation. - Performance measures and competitive objectives impacted by capacity strategy decisions.

2. Capacity Strategy Configuring Capacity Managing Capacity Change Type of Capacity Overall Level of Capacity Location of Capacity Timing of Change Magnitude o f Change Issues in capacity strategy Location of changed capacity

3. Efficiency Actual output Effective capacity 3724 4134 90.08% = = = Efficiency Actual output Effective capacity 4622 5437 85.01% = = = Ice C ream Division Canned F ood Division Total Capacity 7896 hrs Planned Loss 3762 hrs Effective Capacity 4134 hrs Actual Output 3724 hrs Avoidable Loss 410 hrs Total Capacity 7896 hrs Planned Loss 2459 hrs Effective Capacity 5437 hrs Actual Output 3724 hrs Avoidable Loss 815 hrs Utilization Actual output Total capacity 3724 7896 47.16% = = = Utilization Actual output Total capacity 4622 7896 58.54% = = = Utilization and efficiency measures for two divisions of a food processing company

4. Forecast level of demand Changes in future demand Uncertainty of future demand Consequences of over/under supply Availability of capital Cost structure of capacity increment Economies of scale Flexibility of capacity provisions Some factors influencing the overall level of capacity OPERATIONS RESOURCES MARKET REQUIREMENTS Overall level of capacity

5. Issues include….. LONG-TERM CAPACITY CHANGE STRATEGY NUMBER OF SITES LOCATION OF EACH SITE ALLOCATION OF TASKS TO EACH SITE CAPACITY OF EACH SITE

6. Questions: “ Who should be involved in these decisions?” “ How does the company make this type of decision?” Questions Options NUMBER OF SITES and CAPACITY OF SITES LOCATION OF SITES ALLOCATION OF TASKS TO SITES LONG-TERM CAPACITY CHANGE STRATEGY Many small sites? Few larger sites? Supply side dominated? Demand side dominated? All sites make all products/services? Each site focuses on a few products/ services? Capacity leads demand? Capacity lags demand?

7. Why is capacity strategy important? Without an appropriate capacity strategy operations will always be struggling to supply markets in a competitive manner Getting capacity strategy right is the starting point for developing competitive operations

8. LONG-TERM CAPACITY CHANGE STRATEGY NUMBER OF SITES LOCATION OF EACH SITE CAPACITY OF EACH SITE ALLOCATION OF TASKS TO SITES What performance measures will all these decisions have a major impact on ? ? How should one judge a capacity strategy ?

10. The three options ….. Time Demand Capacity Volume Time Capacity Leading Strategy Demand Capacity Volume Time Capacity Lagging Strategy Demand Capacity Volume Time Capacity Smoothing Strategy

11. 2 4 6 8 10 12 0 0 2 4 6 8 10 12 Costs / Revenue ($) Volume in thousands of units Forecast demand = 9000 units Cost Revenue Cost, volume, profit illustration

12. 1 2 3 4 5 6 0 0 2 4 6 8 Unit cost (total cost / volume) Volume in thousands of units (a) Nominal capacity limit 1 2 3 4 5 6 0 0 2 4 6 8 Unit cost (total cost / volume) Volume in thousands of units (b) Diseconomies of scale kick in Unit cost curve

13. Physical capacity of facilities Effective Capacity Demand Volume Time Cash flow with extended physical capacity Cash flow with two identical capacity increments Cumulative cash flow Time Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term

14. Required service level Geographical distribution of demand Economies of scale Supply costs Some factors influencing the number and size of sites OPERATIONS RESOURCES MARKET REQUIREMENTS Size and number of sites

15. Required service level Suitability of site Image of location Resource costs Land and facilities investment Resource availability Community factors Some factors influencing the location of sites OPERATIONS RESOURCES MARKET REQUIREMENTS Location of sites

16. 0.4 0.6 0.8 1.0 1.2 London (city) Hong Kong New York (midtown) Singapore Stockholm Amsterdam Madrid Office rents in various cities ($’000 per square metre, January 1999) Source: Richard Ellis, The Economist

17. 60 80 100 120 Unit labour costs in various countries (1998) (includes effects of currency exchange rates and productivity) 140 160 Denmark Britain Japan France Germany Sweden Netherlands Spain Source: OECD, The Economist United States = 100

18. Location A Location B Location of operation Costs / Revenue Revenue Costs (a) Location concerned with profit maximization ; ( b) Location concerned with cost minimization Location A Location of operation Costs / Revenue Revenue Costs Fast food restaurant Electronics manufacturer (a) (b)

19. 1000 2000 3000 4000 150000 4m 3m 2m 1m $US Monthly volume (kg) Current volume Revenue 3 Brayford facilities 1 Bi-line 8 facility & 1 Brayford facility Cost-volume-profit curves for two alternative capacity strategies