Capacity Planning
Capacity planning is a long-term strategic decision that establishes a firm's overall level of resources. It extends over a time horizon long enough to obtain those resources--usually a year or more for building new facilities or acquiring new businesses. Capacity decisions affect product lead times, customer responsiveness, operating costs, and a firm's ability to compete. Inadequate capacity can lose customers and limit growth. Excess capacity can drain a company's resources and prevent investments in more lucrative ventures. When to increase capacity and how much to increase capacity are critical decisions.
Figure 11.1(a), (b), and (c) show three basic strategies for the timing of capacity expansion in relation to a steady growth in demand.
Capacity lead strategy. Capacity is expanded in anticipation of demand growth. This aggressive strategy is used to lure customers from competitors who are capacity constrained or to gain a foothold in a rapidly expanding market.
Capacity lag strategy. Capacity is increased after an increase in demand has been documented. This conservative strategy produces a higher return on investment but may lose customers in the process. It is used in industries with standard products and cost-based or weak competition. The strategy assumes that lost customers will return from competitors after capacity has expanded.
Average capacity strategy. Capacity is expanded to coincide with average expected demand. This is a moderate strategy in which managers are certain they will be able to sell at least some portion of the additional output.