Managing the Capacity expansion process

A large of the problem is in managing the potential or real over capacity in the company and in the industry. Appropriate capacity moves can be rather obvious when new products are in their rapid growth phases. Since the potential costs of lost sales are so great in these instances, capacity expansion is usually clearly justified.

Otherwise management problems are centered on capacity gaming, incorporated with a rational process for determining options, assessing future demands is terribly important but rather mechanical and does not accurately represent the nature of the managerial problem. The issue is which numbers to insert in the analysis. Given those numbers, comparative evaluation of alternatives is straightforward.

Capacity Gaming:

Taking the measure of competitors is critical, in part to avoid when possible the potentially disastrous effects of industry overcapacity. In addition, signaling competitors that an expansion is imminent and that it will be in a certain location may be an effective warning for competitors not to go head-to-head with an expansion of their own.

The news announcements earlier regarding capacity/location decisions may have been of this capacity gaming type. Heileman, Brewery, with its announced plans for expansion into the southern market, may have been signaling its intentions. But it was also indicating to competitors that its muscles were strong and that it had the advantages of low cost but modern capacity and an already proven marketing strategy to ensure success. Dow Chemical’s announcement seems to offer intrusion into the specialty chemicals, market. Domtar’s announcement intended to test the reaction of other companies that it would double the capacity at its Windsor, Quebec, paper mill may be particularly important in an industry that had suffered the effects of over capacity in the past. Both the capacity expansion and its location are important in this instance the wood supply near Windsor couples advantageous costs with the target US market just across the border.

Multinational Activity Bases:

The strategic location of activities in multinational settings is an important element in operations strategy. Where manufacturing facilities are involved, three alternate forms can have significant impacts on a variety of costs and other advantages and disadvantages. Different forms for organizing production facilities have been proposed, and we will discuss three “central location the multi-domestic form, and rationalized exchange”.

The central structure establishes one basic location for production and ships the product from it to all markets. For example, a Boeing 747 is made in Seattle and flown to the customer. Similarly, if a foreign customer wants Dupont Nomex or Kevlar, new high tenacity fibers, they are made in the United States and shipped overseas. Centralized facilities provide scale advantages and the accumulation of experience at the system rates for all activities. But centralization does not deal with local content rules that exist in many countries, or with the problems of monetary exchange and short term exchange rate movements.

In the multi-domestic form, a microcosm of operations is established in each of the countries in which the company competes. The advantages are in terms of marketing in having a presence in a country, in easily meeting local content rules, and in providing service. The disadvantages are in fluctuating exchange rates, the cost position of small scale plants, and the fact that experience curve effects were restricted by the multiple plant organization. Although the total volume may be large, experience is accumulated at the lower activity levels of each plant. Massey–Ferguson in the farm equipment field is an example of the multi-domestic form.

Rationalized exchange, the third form, is particularly applicable to complex assembled products and involves allocating components manufacture to the countries in which business is done.