Flexible Capacity: Is it realistic in a down economy?

A recent article over on Supply Chain Brain on preparing for uncertainty noted that:

the imperative of capacity flexibility for design and development departments is especially high in the current uncertain climate. Even though the pressure on controlling operational cost is intensifying, leading to shedding excess capacity, not being able to fulfill demand when needed could lead to a lost customer. And losing customers due to capacity shortfall when demand does spike can lead to more losses than having excess capacity, which limits your loss to overhead.

But how do you create flexible capacity? The article gives us three options:

Create Capacity Options

One option is to buy capacity when needed, instead of retaining dedicated technologies. However, this will increase cost.

Another option is to cross-train dedicated capacity. For example, structural engineers could be cross-trained on mechanical systems and vice versa. Then your engineers could be applied where the need is. However, the engineers will be less productive in these secondary areas that they rarely work in, which will increase cost as the work will take longer and require a greater degree of care in review.

A third option is to use multiple vendors. However, if demand is forecasted to be low, and commitments are minimal, the chances of you getting the best price on a per-unit basis are slim to none.

Rolling Forecast Mechanism

Use periodic rolling forecasts that are updated regularly, and at least quarterly, and ramp available capacity up or down on a regular basis, such as every quarter, based on the rolling forecast updates. However, it costs you money every time you have to recruit someone or lay them off. Furthermore, what happens if you can’t find the talent fast enough when you need to ramp up quickly?

Layered Sourcing

Maintain captive capacity at the expected minimum demand level for a given time period (such as a year) and then have on-demand contracts with additional providers who serve as capacity reservoirs. The spot-buys from the capacity reservoirs will be more costly, but will always correlate against actual demand.

But how realistic is each of the above in the current down economy?

Capacity options

Buying capacity when needed sounds good, but without guaranteed income, many more suppliers are going to go out of business. So it might not be there when you need it.

Your staff is probably already over-worked, and under-paid, and chances are you’ve already made the mistake of cutting the training budget, which is usually the second thing to get cut after the travel budget. So this probably isn’t an option either.

More vendors than necessary is not going to save you money, so that’s not a good option either.

Rolling Forecasts

Not only can you probably not afford the costs associated with hiring and firing every quarter, but you’re probably already running at minimum staff levels. Thus, even though you should be using rolling forecasts anyway, you can’t really use them as a fountain of flexible capacity.

Layered Sourcing

This could work, as long as your captive vendors also give you the option for reserve/ramp-up capacity because even if your reserve vendors don’t go out of business, it could take them time to ramp-up.

In conclusion, in a down economy, your options for flexible capacity are limited and layered sourcing might be your only alternative. Any differing opinions?

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