There is an opportunity to grow; you have assessed the market, tested demand, perhaps you are trading via a distributor or you have operations on the ground already. Now it seems the time is right to make a bolder step. It could be this is on home turf and you are confident you know enough about your operation to make a big step up; it may be in a new geography, but business is business the world over and you are down the track on establishing new relationships. The supply chain has worked pretty well to date and any issues have been jumped on and solved. What could go wrong?
Scaling up operations and the associated supply chain activities are fundamental decisions; the consequences of getting them wrong are always serious and can be fatal to a firm’s competitive capabilities and survival. Capital employed and costs will increase; can these be offset by increased revenues in time? In this blog series, we consider the 7 C’s that should be focus areas when expanding supply chain operations and how to navigate a path to success. In part 1, we are going to focus on Capacity.
Too much capacity and resources are underutilised, with costs driven up; too little capacity and customer demand cannot be served, and revenues are missed. The risks inherent to strategic capacity planning are in both badly configured resources at the outset and mismanagement of changing capacity over time.
Notwithstanding the role of financial assessments such as payback period, cost-benefit analysis, net present value and rate of return, there are some essential questions that need to be answered:
- What estimated demand must be satisfied and what is the range of possible volumes?
- What is the fundamental role of the new operations/sites created?
- How are the core supply chain trade-offs between service, cost, and capital affected and how are they expected to develop over time?
Net cash flows and discount rates rely on estimates of demand and an assessment of the risk associated with the capital investment. It is likely that forecast demand will show a smooth S curve over a defined period (typically a launch period followed by steep growth before volumes start to level out), probably as new capacity comes neatly online to satisfy it.
The likelihood of this happening is remote. Uncertainty around demand should be expected; delivering exact levels of capacity at set milestones is also questionable. Estimating the probability of expected demand with maximum and minimum ranges is helpful to support the development of a decision tree; we will discuss how this can be enhanced later. Similar estimates of project risk for new capacity will aid contingency planning.
It is at this point that the business must decide on its strategic approach to capacity planning; should capacity come on stream ahead of demand, should it lag demand or should increments be buffered with inventory (if feasible)? Some pros and cons are:
A key concern is how will the market react to a situation of under or over capacity? Will some degree of scarcity maintain or increase value? What is the scale of competitive threat and will any shortfall be seized upon? Could ‘spare’ capacity be used to drive and secure share at a key stage in market development?
Expanding an operation on a significant scale is a strategic decision; the role of new sites and facilities needs to be considered both in light of the business strategy and the potential opportunity that the site location(s) can bring. Treacy and Wierseman’s strategy model 1 argues that a company can be a market leader by excelling at one of three strategies: operational excellence (cost), product leadership (quality) or customer intimacy (service). Factors such as tariff and trade concessions, reduced labour costs, capital incentives and subsidies are well established in many supply chain designs; important other dimensions such as customer service, supplier development, attracting skilled and talented employees, and the potential to create centres of expertise and excellence should not be overlooked. Can new sites do much more than simply add capacity?
Any supply chain is an integrated network of activities. Expansion at one link in the chain needs to be balanced with other elements. Somewhere in the chain is a bottleneck; knowing where this is and, when scaling up operations how this is affected, is critical for success. Collaboration, discussed later, can play a pivotal role here as it also can in managing uplifts to operating capacity to retain flexibility and manage the transition of variable to fixed cost as operations grow. A detailed analysis of the supply chain, including an appraisal of how capacity can be added and at what speed, will allow the drawing of a strategic decision tree that highlights options with associated risks and probabilities in support of a systematic approach.
All these factors can be weighed in an analysis that links supply chain design to financial trade-offs. Supply chain excellence is about balancing service, cost, and capital to deliver the business strategy and desired return on investment. Operational performance has clear links to revenue growth, cost optimisation and capital efficiency. Knowing these dimensions at the outset and how they are expected to develop as operations scale up, will provide a compass in a volatile and uncertain environment, allowing course corrections and clear priorities to be set.
In next week’s blog, we’ll be looking at Culture, Capability and Collaboration and how they can affect your success when scaling up your operations.