CASELET : CAPACITY PLANNING

The past sales performance and the future expectations of sales of Consumer Durable

Manufacturer are given below:

Year Sales

Y 0 14,998 units

Y 1 15,202 units

Y 2 15,481 units

Y 3 15,814 units

Y 4 16,255 units

Y 5 16,837 units

Y 6 17,408 units

Y 7 19,133 units

Y 8 25,013 units

The Marketing Department of the Company has worked on the forecasted projections of Sales for next six years as follows:

Year Sales

Y 9 37,000 units forecasted

Y 10 41,000 units forecasted

Y 11 43,000 units forecasted

Y 12 44,000 units forecasted

Y 13 45,000 units forecasted

Y 14 45,000 units forecasted

The Central Government had reduced VAT from 40 % to 32 % in Y7 and has further reduced the VAT to 16 % in Y8. No further reduction in VAT is expected in the next 2 - 3 years. However, industry sources believe that the VAT may be rationalized at 8 % later on.

The current capacity is 18,000 units if plant is operated on two-shifts basis (27,000 units on three-shifts basis). The plant has three parallel lines. Line 1 with a capacity of 2,400 units was installed when the company started 25 years ago; Line 2 having a capacity of 3,600 units was installed in 15 years ago and a modern Line 3 (consisting of faster, bigger equipment) having a capacity of 12,000 units was installed in Y0. All the above-mentioned capacities are on two-shifts basis.

The management policy is to run the plant on two-shifts only, the third shift is reserved for maintenance and any other exigencies.

You can notice that the operations have been carried out to a small degree in the third shift in Y7, and a substantial degree in Y8. Workmen have been given overtime, temporary workmen have been employed, delivery lead times have been stretched and maintenance has been compromised to meet the sales demand. The matter of fact is

that sales team required 30,000 units in Y8, but this demand cannot be satisfied, and hence the management had budgeted 25,000 units.

Currently, proven technology manufacturing lines with capacity of 26,000 units (on two-shifts basis) are available and exhibit considerable reduction (nearly 35 % less than the current levels) in the operating expenses per unit. Old technology lines [having capacity of 2,400 units, 3,600 units and 12,000 units] are available too at lower fixed assets value, but operating expenses would be at current levels.

The management wishes to expand capacity, since the demands in Y7 and Y8 have demonstrated the strength of the company's brand and the operations' resources have been strained for more than a year.

If machines and equipment are ordered now, they will be available by first quarter of Y9 for normal production.

Second hand machines are not available.

As a Policy, subcontracting manufacturing is not permitted.

You can mothball / scrap the old lines as part of your decisions.

Prepare a proposal recommending the capacity decision with the rationale.

ASAP