Management may choose to build up capacity in anticipation of demand or in response to developing demand. Explain the advantages and disadvantages of both approaches. To illustrate some of the advantages and disadvantages, provide specific examples of companies that have used each strategy. Three things that are important when planning capacity is “maintaining system balance, frequency of capacity additions or reductions, and the use of external capacity. ” (Jacobs, Chase Pg 75) Some of the advantages of anticipating demand – assuming you are right about your assumptions – are saving on costs of output.
If you are able to forecast sales you can build your capacity to the perfect amount of overhead and project for equipment and labor costs. However if you over build capacity you could have too much overhead that will go to waste. An example of a company that builds up capacity in anticipation of demand is Stewards Company. They have two flavors of salad dressing: Paul’s and Newmans. Both come in bottles and plastic individual size packets. They use forecasting techniques and decision trees they determine what equipment and labor costs will be.
Another example of a company that uses service to build capacity is Shouldice Hospital (Jacobs, Chase Pg 87) They are known for hernia repair. They are successful and utilize their facilities in a smart way to successfully have patients choose their hospital when medical treatment is needed. They have five operating rooms and a recovery room. They have 12 full time surgeons and average 4 operations a day. The thing that helps Shouldice is their utilization of time and beds to handle the day to day operations.