Capacity planning involves the process of evaluating not only a firm’s plant and equipment productive capacity but also the level of production optimization associated with the work force. In addition, it involves the analysis of cost –effective production that minimizes production costs, while at the same time maximizing revenue.
Since manychip is not sure whether the increased demand will be sustainable in t5he long run I would recommend the company to subcontract (outsource) the increased demand on its productive capacity.
Outsourcing or subcontracting is a method that is used in many industries especially the construction sector. Subcontracting involves giving a firm within the same industry part or all the formula for producing a certain good. If the company gives the entire formula then the company subcontracted is in many cases specialized in that specific field. If this is the case then the company has some economies of scale and thus produces the good more cheaply than the subcontracting company produces. If this is the case then the company charges a lower price than the subcontracting company incurs.
In this case, thus, I would advise the company to subcontract since this will lower operational costs in the short term; it will also maximize revenue as well as profits, which are the current targets the company needs to maximize in the short run.
In this scenario all, the above-suggested capacity planning methods are viable. However, the problem is that they will all increase operational costs in the short run, which the company is not ready to accommodate. Since this might lead to a moderate increase in product prices, and given that this market is volatile, there might be a drop in sales. This drop in sales will also lead to an increase in the cost of depreciation that the company is not in a situation to write off.
There is also the risk that adopting product design flexibility may cause the production time to increase.
If this was to happen, there is the problem that maybe product delivery delays that may not auger well with customers. If this was to happen, there is the risk that the company may experience contract cancellations. If this was to happen, the company will bear the entire loss. If the company chooses to subcontract it will be assured of the fact that even if there were to be product delays then there will be a third party to bear the cost.
As Manychip Inc subcontracts, the additional demand it will be able to use the increased profits to upgrade its factories to accommodate the excess demand without the increased cost of more working hours, more work force, or the use of temporally storage facilities.
Hadjimichalakis M. (1982) Modern Economics, Prentice Hall Publishers, New Jersey
H. Stratton (1999) Economics: A New Introduction, Pluto Press, USA
Thomas A. and Paschal Francis (1995) Beyond Rhetoric and Realism in Economics: Towards a reformulation of economic methodology, Rout ledge, UK
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