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Part Two
Design
Table 6.4 The arguments for and against pure leading and pure lagging strategies of
capacity timing
Advantages
Capacity-leading strategies
Always sufficient capacity to meet demand,
therefore revenue is maximized and
customers satisfied
Most of the time there is a ‘capacity cushion’
which can absorb extra demand if forecasts
are pessimistic
Any critical start-up problems with new plants
are less likely to affect supply to customers
Capacity-lagging strategies
Always sufficient demand to keep the plants
working at full capacity, therefore unit costs
are minimized
Over-capacity problems are minimized if
forecasts are optimistic
Capital spending on the plants is delayed
Disadvantages
Utilization of the plants is always relatively low,
therefore costs will be high
Risks of even greater (or even permanent)
over-capacity if demand does not reach
forecast levels
Capital spending on plant early
Insufficient capacity to meet demand fully,
therefore reduced revenue and dissatisfied
customers
No ability to exploit short-term increases in
demand
Under-supply position even worse if there are
start-up problems with the new plants
‘Smoothing’ with inventory
The strategy on the continuum between pure leading and pure lagging strategies can be
implemented so that no inventories are accumulated. All demand in one period is satisfied
(or not) by the activity of the operation in the same period. Indeed, for customer-processing
operations there is no alternative to this. A hotel cannot satisfy demand in one year by
using rooms which were vacant the previous year. For some materials- and informationprocessing
operations, however, the output from the operation which is not required in
one period can be stored for use in the next period. The economies of using inventories are
fully explored in Chapter 12. Here we confine ourselves to noting that inventories can be
used to obtain the advantages of both capacity leading and capacity lagging. Figure 6.10(b)
shows how this can be done. Capacity is introduced such that demand can always be
met by a combination of production and inventories, and capacity is, with the occasional
exception, fully utilized. This may seem like an ideal state. Demand is always met and so
revenue is maximized. Capacity is usually fully utilized and so costs are minimized. There is
a price to pay, however, and that is the cost of carrying the inventories. Not only will these
have to be funded but the risks of obsolescence and deterioration of stock are introduced.
Table 6.5 summarizes the advantages and disadvantages of the ‘smoothing-with-inventory’
strategy.
Table 6.5 The advantages and disadvantages of a smoothing-with-inventory strategy
Advantages
All demand is satisfied, therefore customers are
satisfied and revenue is maximized
Utilization of capacity is high and therefore
costs are low
Very short-term surges in demand can be met
from inventories
Disadvantages
The cost of inventories in terms of working
capital requirements can be high. This is
especially serious at a time when the company
requires funds for its capital expansion
Risks of product deterioration and
obsolescence