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As
a kid of the fifties, I thought Marilyn Monroe was really
something. She was gorgeous. As a ten year-old I planned to
ask her to marry me when, and if, I ever actually met her.
Alas, I never did and I was prevented from making the same bad
decision that several of her ex-husbands made. But, at the
time I was sure it was the best thing I could have done. She
looked so good how could I possibly be wrong? A lot of people
in management seem to feel the same way about capacity.
It
has been said that the creation and maintenance of capacity is
basis of every operations management textbook ever written.
There are three fundamental questions when it comes to
capacity: how to get it; how to use it; and how to get rid of
it. Almost daily, and in nearly equal proportions to each
other, we read about companies that are acquiring or adding a
plant; being more efficient; or shutting down a production
line/plant/business. Truly, one of the most vexing problems
for operations professionals is managing capacity.
No
industry is immune as management struggles to balance supply
with demand. It is actually not that hard to pin down supply;
it's usually constrained by equipment, people, buildings,
materials, etc. It is demand that gives us fits; trying to
figure what the customers want and, importantly, when.
Forecasting
was developed as a tool to predict customer demand but a
couple of things were discovered. First, history is not
necessarily a good predictor of the future. Second, demand
follows taste and tastes change. Consequently, it is
understandable when someone says that the two most prevalent
outcomes of forecast predictions are either lucky or wrong.
Management
makes huge investments based on these forecasts. Plants are
built, equipment purchased, and people hired in hopes of
balancing capacity to anticipated demand. When it works out
everyone's happy. When it doesn't, bad things happen: plants
close; people are fired; and investors lose money. The biggest
problem is that even when you're right, eventually you can
turn out wrong when tastes change and demand changes along
with it.
There
are two times to worry about your business: when you don't
have enough and when you have too much. Of the two, having too
much is more dangerous. Ford recently announced plant closures
and employee terminations that will reduce capacity over 25%.
The cost will be in the billions. It was also in the billions
to have built that much capacity in the first place. At one
time they were right. Now they're wrong. You get too much
capacity when you think the good times won't end, that
customers won't change, and competition won't wake up.
In
a nutshell you get too much capacity by making bad choices
about how to meet demand; choices that may have looked good at
one time. Sort of like my feelings for Marilyn, adding
capacity looks like such a good thing. Then you find yourself
in trouble.
There
is an alternative: build flexibility to allow you to respond
to changing consumer demand without incurring the sunk costs
associated with plants, equipment and too many people. Rather
than waiting until you're in trouble, reduce capacity and
build flexibility. You may be surprised that throughput and
sales won't be affected nearly as much as you think. In fact,
a reduction of capacity might actually lead to more throughput
and sales. Unlike the bricks and mortar of new plants or the
planned obsolescence of new machinery, flexibility is much
less expensive and more valuable when demand changes.
Think
of it this way. Capacity is like Marilyn Monroe. Flexibility
is like your mother.
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