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Capacity Investments - Coggle Diagram

- - - - quarters or years
      - Decisions
        
        capacity technology
        
        capacity location
        
        capacity expansion (contraction) of hard-to-flex assets
        
        Examples
        
        Equinix - launches fourth data centre in SG
        
        BASF - invests €40M in new SG site with 6 crop protection formulation technologies, 30+ employees, capacity 7000 kl/year
        
        Barry Callebut - added another chocolate production line to its SG facility to meet increased demand in Southeast Asia
        
        Fedex - spent $1.8B to expand unit's capacity
      - 1 to 5+ years
  - - - hours or days
      - Decision
        
        scheduling for existing assets
      - 0 to 30 days
    - - weeks or months
      - Decisions
        
        optimal allocation of existing capacity
        
        capacity levels of easy-to-flex assets
      - 1 to 18 months
- - - - Forecast cost (CapEx, Operating)
        
        impacted by e.g., regulations
      - Forecast capacity (bottleneck, loading, OEE, max sust. output)
        
        impacted by economies of scale, learning and continuous improvements
      - Forecast willingness-to-pay, prices
      - Forecast macro-ecnomics aspects
        
        e.g., exchange rates
      - Forecast demand volume
      - Forecast lead time to build capacity
      - Forecast supply volume (may become bottleneck)
      - Understand irreversibility (what options do you have)
      - Understand uncertainties to optimise size & calculate expected NPV
  - - - "capacity caps output"
  - - - e.g., staff training in call centre
  - - - substitution
      - lost sale
      - loss of goodwill & smaller future demand
      - customer wait
- - - - each product requires a different amount of time of an asset
    - - _ hours/year x Total effective equipment performance (TEEP)% x Bottleneck max sust TP (units/hour)
        
        TEEP (%) = Loading % x Bottleneck OEE %
    - - bottleneck assets = asset that constraints the max. throughput
  - - - e.g., buildings, equipment, machinery, vehicles
    - - e.g., employee salaries, rent, utilities, property taxes, and cost of goods sold (COGS)
- - - - Coefficient of variation COV = Standard deviation ÷ Mean
        
        useful relative volatility measure of forecast precision
      - central limit theorem says normal (mean + std. dev) is fine approximation
- - - - Goal setting, often connected to incentive systems
      - Budgeting & financial reporting
- - - - Expected NPV calculation
      - E[NPV(K)] = p1V1(K) + p2V2(K) +p3*V3(K) - Capex (K)
  - - - the latter gives rise to the celebrated news vendor solution
    - - (Operating profit of marginal capacity unit) x Pr(D > K) > marginal capacity cost
    - - implementing the change as long as MB > MC guarantees an improvement in E[NPV]
      - if the objective function is unimodal (only one maximum), marginal analysis will lead to the optimal solution
      - compare marginal benefit MB vs. marginal cost MC
    - - such that the probability that the asset is a bottleneck at K-1 [Pr(D>K-1)]
        
        is still higher than the marginal capacity cost to the operating profit of marginal capacity unit
- - - - an increase in volatility means a wider distribution
      - and thus larger optimal capacities
    - - downside lowers more than (capped) upside
      - and thus lower profits since investment costs also rise
  - - - z* = norm.s.inv (1 - marginal capacity cost/operating profit of marginal capacity unit)
      - z > 0, if operating profit of marginal capacity unit > 2 marginal capacity cost
      - Increased volatility increases shortfall (lost sales), mitigated by safety capacity
- - - - WACC as r or the corporate required hurdle-rate
    - - Will rightly assign more value to projects with lower volatility
      - Will lead to more optimal capacity investments (optimal amount of safety capacity)
      - But may put project valuations at a disadvantage compared to projects that only rely on discount rate r to adjust for volatilities
    - - only the real tax deduction on depreciation is relevant
  - - - capture trend + consider several scenarios & associated probabilities
      - then, evaluate all capacity investment options using same set of scenarios & calculate expected NPV
    - - (Capacity caps sales)
    - - (continuous improvements or degradation)
    - - (to capture changes even without actions)
      - it is easier to do 2 separate discounted cash flow analyses
        
        do not invest
        
        do invest
        
        and find NPV of investment as their difference
- - - - Determine the factors in the model
        
        e.g., capacity, investment costs, demand forecast & price
      - Determine scenarios
      - Assign probabilites
      - Estimate cash flow for each scenarios
      - Compute Expected NPV = E[NPV]
- - - - make products wait
    - - make customers wait
    - - make resources wait
  - - - in seasonal industries, if the cost of capacity is small compared to the cost of holding inventory
        
        capacity can be sized to meet peak demand
        
        e.g., Dell
        
        otherwise capacity is sized smaller than peak demand & inventory is built during the low season
        
        e.g., Koss
      - if the cost of capacity is small compared to the cost of waiting customers
        
        excess capacity will be put in place
        
        otherwise, customers will be asked to wait
- - - - Demand/ Revenue management
        
        e.g., dynamic pricing
      - Use & reduce the cost of inventory, backlogs, and waiting to minimse impact
      - Prepare substitutes
    - - Increase life-span of capacity
      - Reduce marginal cost of:
        
        Capacity
        
        Franchising
        
        Subcontracting
        
        Overtime/Temp
        
        Spot market buying
    - - Average demand
      - Volatility (use historical forecasting errors as guide)
      - Use capacity lead time reduction & flexibility
      - Distinguish planning from other uses