Question

Facilities Management may choose to build manufacturing capacity in anticipation of forecasted orders or in response to developing order quantities. Cite the advantages and disadvantages of both approaches to facilities capacity management.

Answer 1

The strategy of building up manufacturing capacity ahead of demand is a risk-taking stance. Investment is based on projections. This investment involves costs for new facilities, equipment, human resources, and overhead. If the demand materializes, the investment is worthwhile since the firm may capture a large amount of market share. If it does not materialize, the firm must redirect the invested resources. This strategy is most appropriate in high growth areas. If the demand materializes, but the capacity planning strategy is risk-averse, i.e, building capacity only as demand develops, then most likely market share will be lost. The growth in demand will encourage new entrants, resulting in more competition. The risk-averse strategy may be most appropriate for small firms who cannot afford to invest in unproven prospects. To prevent potential loss of market share, firms may choose to incrementally increase the capacity to match the increase in demand.