Capacity expansion strategies are essential for businesses to meet increasing demand, seize market opportunities, and achieve growth objectives. Several approaches can be adopted to expand capacity effectively. Before selecting a capacity expansion strategy, businesses should conduct thorough market research, financial analysis, and risk assessments to ensure the chosen approach aligns with their long-term goals and capabilities.
Top Capacity Expansion Strategies in Operations Management
There are four long term capacity planning strategies, which have been shown in the following graph depiction. They have been discussed in detail in subsequent points.
1) Demand Leading Strategy
This type of strategy envisages maintenance of excess capacity, which ensures that the organization’s response to an unanticipated increase in the demand for its products is prompt and the time deliveries are made in a hassle-free and undisruptive manner without resorting to overtime. It is an important capacity expansion strategies.
Demand lead strategy is very effective in today’s fast-growing market, as it has a competitive edge over organizations reeling under the capacity constraints features. Its ability to satisfy the customer’s demand for excess capacity facilitates an organization to get a larger market share.
Compaq Computers is a typical example of demand exceeding the production capacity; on two separate occasions, first in 1990 and the second in 1993, when it launched new models, many of its potential customers opted for other brands of computers due to a shortage of its products. It is the capacity expansion techniques. The management of Compaq Computers took prompt corrective measures by significantly enhancing its production capacity (even at the cost of unutilized capacity) so that any low demand for its products could be met.
2) Demand Trailing Strategy
This strategy differs from the demand-leading strategy. Under the demand trailing strategy, capacity expansion strategies, the existing capacity is utilized at the highest (maximum) level without adding further capacity unless and until the demand is projected to be more than the current capacity in the long-term perspective. There are certain assumptions under this approach, viz.:
i) That there are certain measures (e.g., overtime work, sub-contracting) which a company may resort to to enhance its short-term capacity.
ii) Most customers may bear that delay in delivery to some degree. Although adopting this strategy may keep capital equipment cost per unit low, the cost incurred due to overtime and sub-contracting may be excessive. Further, being poorly responsive to customers’ demands, especially failure to deliver on time, may result in losing sales and customers.
3) Demand Matching Strategy
Demand matching strategy is a balanced approach in which an attempt is made to match the capacity with the demand. It is found to be very successful in the following conditions
- i) if the demand can be forecasted precisely.
- ii) rate of growth in demand is comparatively stable.
iii) capacity addition is more or less uniform.
Under the above conditions of capacity expansion strategies, the application of this strategy results in reducing the costs of (i) facility underutilization, (ii) erosion in sales due to shortages, and (iii) inventories.
4) Steady Expansion Strategy
The biggest shortcoming of the demand trailing and demand matching strategies is that the decision for capacity addition is taken during the peak period of a business cycle (when the demand is at its highest level), which is precisely the time when the competitors also contemplate capacity enhancement. Under the above situation, additional capacity costs tend to be generally high, and the lead time for such capacity addition is also long. This results in a delay in capacity availability when the peak business period is over. In other words, the capacity procured at a high cost is not available when required most.
If expanding in-house capacity is not feasible or cost-effective, outsourcing certain processes to third-party vendors can be considered. This strategy allows companies to focus on core competencies while leveraging external capabilities.
The above shortcoming is overpowered in a steady capacity expansion strategies, which provides capacity addition consistently. Thus, the company can add some volume of inexpensive capacity during the non-peak period and acquire the capacity at a high cost during the peak period, and the average cost becomes reasonable. It is a long-term strategy comparable to rupee cost averaging, which is common in equity investments.