Industry Capacity and Competitive Dynamics

Perhaps the most important questions of all to pose are, “Should any capacity be added within the industry? And the corollary questions, Should this firm be the one to add it? Answering these questions carefully and with analytical detachment is of the greatest importance. Some of the information needed for the answers may come from long term projections of demand, but careful study of the competition’s capacity and whatever can be leaned about their expansion plans is crucial because strategic capacity moves within an industry can have extremely important price and competitive impacts.

Mature Products and Stable Demand Growth:

Many products and services enjoy mature, stable markets. Examples of mature products and commodities are steel, aluminum, fertilizer, cement, and automobiles. Examples of mature services are airline travel and health care. This does not mean that these products and services are not impacted by recessions but that the long term trend in demand is relatively stable, compared to other situations. Recalling the predictive methods were the Delphi methods, market surveys, historical and life cycle analyses ad scenario based forecasting. The causal forecasting methods were the regression and econometric models. In addition to these formal predictive methods, executive opinion and extrapolation are common methods for estimating future demand.

Given long range predictions of demand, we must generate capacity requirements. It is unlikely that these capacity needs will be uniform throughout the productive system. A balance of capacities of sub-units exists that reflects the discrete nature of capacity. For example, the existing receiving and shipping operations and factory warehouse area may accommodate a 50 percent increase in output, but the assembly line may already be operating at full capacity and the machine shop at 90 percent of capacity.

Identifying the size and timings of projected capacity gaps provides an input for the generation of alternative plans. We may plan to meet demand either by providing the expected required capacity or by partially utilizing alternative sources, or we may absorb some lost sales. We can provide the needed capacity in smaller increments as it is needed or in larger increments that may involve initial slack capacity. We may enlarge existing facilities, establish new producing locations for the additional capacity, or relocate the entire operation.

New Products and Risky Situations:

It is difficult to predict capacity requirements for new products initially or in the rapid development phase of product life cycles. There are also situations involving mature, stable products, such as oil, in which the capacity planning environment is risky owing to unstable political factors. The prediction of capacity requirement in these kinds of situations must place greater emphasis on the distribution of the expected demand. Optimistic and pessimistic predictions can have a profound effect on capacity requirements.

Generation of Alternative Capacity Plans:

When capacity gaps have been identified, alternative plans can be considered. These alternatives may involve the size and timing of added capacity the use of overtime and multiple shifts, the use of outside capacity sources, the absorption of lost sales, or the location of new capacity.

Large or Small Capacity Increments:

When an enterprise enjoys stable demand growth, the issues are centered on how and when to provide the capacity rather than if capacity should be added. Taking the data for expected capacity requirements, there is linear growth in capacity requirements of 1000 units per year. One issue is whether capacity should be added more often in smaller increments to keep up with demand or less often in larger increments.

The slack capacity declines with increase in requirements and falls to zero, if the timing is perfect, just before the next increment to capacity is installed. Whether smaller or larger increments of capacity will be more economical depends on the balance of incremental capital and the operating costs of a particular organization and on whether or not economies of scale exist. A unit of capacity added now may cost less than a unit added later, yet the slack capacity must be carried as additional overhead until it is actually productive.