MANAGING CAPACITY

Firms use a combination of the following approaches to reduce the cost of

capacity required to meet predictable variability:

Time flexibility from workforce: In this approach, a firm uses flexible

work hours by the staff members to vary capacity with demand. In many
instances, plants do not operate continuously and are left idle during
portions of the day or week. Therefore, spare plant capacity exists in the
form of hours when the plant is not operational. For example, many plants
do not run three shifts, so the existing workforce could work overtime
during peak periods to produce more to meet demand. The overtime is
varied to match the fluctuation in demand. In such settings, use of a part-
time workforce can further increase capacity flexibility by enabling the
firm to put more people to work during peak periods. This system allows
production from the plant to match demand from customers more closely.

Use of seasonal workforce: In this approach, a firm uses a temporary

workforce during the peak season to increase capacity to match demand.
The tourism industry often uses seasonal workers. A base of full-time
employees exists, and more are hired only for the peak season. Toyota
regularly uses a seasonal workforce in Japan to match supply and demand
better. This approach may be hard to sustain, however, if the labor market
is tight.

Use of dual facilities—specialized and flexible: In this approach, a firm

uses both specialized and flexible facilities. Specialized facilities produce
a relatively stable output of products over time in an efficient manner.
Flexible facilities produce a widely varying volume and variety of
products, but at a higher unit cost. For instance, an electronics component
manufacturer might have specialized facilities for each type of circuit
board as well as a flexible facility that can manufacture all types of circuit
boards. Each specialized facility can produce at a relatively steady rate,
with fluctuations being absorbed by the flexible facility.

Use of subcontracting: In this approach, a firm subcontracts peak

production so internal production remains stable and can be done cheaply.
For such an approach to work, the subcontractor must have flexible
capacity and the ability to lower cost by pooling the fluctuations in
demand across different manufacturers. Thus, the flexible subcontractor
capacity must have both volume (fluctuating demand from a manufacturer)
as well as variety (demand from several manufacturers) flexibility to be
sustainable. For example, most power companies do not have the capacity
to supply their customers with all the electricity demanded on peak days.
They rely instead on being able to purchase power from suppliers and
subcontractors that have excess electricity. This allows the power
companies to maintain a stable supply and, consequently, a lower cost.

Designing product flexibility into the production processes: In this

approach, a firm has flexible production lines whose production rate can
easily be varied. Production is then changed to match demand. Hino
Trucks in Japan has several production lines for different product families
in the same plant. The production lines are designed so that changing the
number of workers on a line can vary the production rate. As long as
variation of demand across different product lines is complementary (i.e.,
when one goes up, the other tends to go down), the capacity on each line
can be varied by moving the workforce from one line to another. Of
course, this requires that the workforce be multiskilled and able to adapt
easily to being moved from line to line. Production flexibility can also be
achieved if the production machinery is flexible and can be changed easily
from producing one product to producing another. This approach is
effective only if the overall demand across all the products is relatively
stable. Several firms that produce products with seasonal demand try to
exploit this approach by carrying a portfolio of products that have peak
demand seasons distributed over the year. A classic example is that of a
lawn mower manufacturer that also manufactures snow blowers to
maintain a steady demand on its factory throughout the year.