Capacity Strategy at Alden Products

Capacity strategy should embody a mental model of how a firm works in a given industry and geographic region. There are a series of assumptions and predictions about the log-term behaviour of markets, technologies, costs and competitor’s behaviour. Such a model would include the following factors: * Predicted growth and variability of demand for the firm’s products and services * Costs of building and operating different sized-facilities * Likely rate and direction of technological evolution Expected behaviour of competitors * Anticipated availability, capabilities and costs of external suppliers The European organization of Alden Products, Inc. is contemplating a doubling of unit sales over the next ten years. Their largest plant, located in Holland, was set up 25 years earlier to supply all demands of the EEC countries on the continent. It has since expanded six times. The question in mind pertaining to the case is that: * Should it expand again? * Should it build a new plant in Southern Europe? Or should it expand its use of contract fillers? As of 1988, 75% of Alden-Europe’s sales took place on the continent and 25% came from UK. Out of 75% of the continent, * 25% came from France, * 12. 5% came from Italy, * 37. 5% came from Spain and Germany Alden-Europe’s overall growth was expected to average over 40% per year but this varied across various countries. Thus, there was a high degree of uncertainty about the growth rate in several countries. The capacity strategy adopted by API was Policy C: Add Capacity Only after Demand Exceeds It. This policy implies that the company’s capacity plan will contain a negative cushion so that the likelihood of running short is greater than the likelihood of having excess capacity. As per my analysis of the scenario, I feel that API should expand at Uniplant based upon the following factors: How capacity and operations management will interact in case of expansion? An operation’s actual capacity is affected by some important factors. They are as follows: 1. Capacity is technology based: A number of Uniplant’s products used proprietary formulations and ingredients. Opening up a plant in new location would make the management get reluctant to risk the secrecy of these formulations. The same would be applicable if they would go ahead with contract fillers. 2. Capacity depends on the interaction of multiple resource constraints: Uniplant attains the following advantage over Southern Europe in matters like: * No additional land needed * Availability of labour * Fewer additional employees * Cost Advantage in terms of production of own plastic bottles Availability and long-term relationship with suppliers * Speed up the processing time . Capacity is location specific: Holland is a desirable place in terms of access to raw materials, proximity to markets via existing rail lines and highways, labour costs, tax rates and political and social stability. 4. Capacity is mix dependent: The capacity of the plant which was under 90% was greatly dependent on the production mix which included both the product mix and size mix. Different products/services consume different amounts of various resources, so a change in location could affect the product mix as the availability of the various resources could also differ. Capacity depends on management policies: The management was clear about the fact the product quality should be clearly distinguishable as superior to the competition in terms of performance, packaging and design finish. Hence by subcontracting, the company would increase the risk of reduction in quality and customer service and increase in indirect costs. 6. Capacity is affected by the degree of variability of demand: Sales in different countries were expected to grow at different rates. There were also changes predicted to occur in wage and exchange rates. Hence, an increase in the number of plants would just complicate the entire issue. In terms of sizing of capacity increments taking into account scale considerations, the company should attain long term economies of scale. This scale refers to the economies that arise from using one large facility rather than a number of smaller ones. This often results in savings because the processing capacity is roughly proportional to its interior volume and its cost is more closely related to the surface area in terms of where the materials and labour hours are concentrated. We also know that though there is a growth in demand, variability exists across different countries. Greater the variability, there are chances that there would be a greater amount of underutilized capacity and at this stage opening a new plant in a different location altogether could make the entire scenario vulnerable. Drawbacks of not opening a new plant in Southern Europe are as follows: * Loose an opportunity to tap a lower cost labour market * Reduction in transportation costs had a new plant come up in Southern Europe * Would not be able to offset the protectionist sentiment in both France and Italy. Thus we see that by adopting the option of expansion at Uniplant, the company would be in a better state as compared to the other options. However a few recommendations in terms of changes to be mad in the expansion plan are provided below: Uniplant’s mark-up price should be reduced from 10% to 5% initially and then become nil in mere future. This would increase the number of sales from the customer point of view and would also help other countries to price their products competitively even during times when there is any kind of fluctuation in exchange rates. They should equalize the unit transportation costs to all subsidiaries which would make the entire process less complex and fair. This would help in maintaining long term relationships with them. Standardized products could be subcontracted but products involving high-technology shouldn’t be under contract filling as this could increase the risk of quality deterioration and increase in indirect costs.