Running a Business
When to Increase Capacity
Written by Andrew Goldman for Gaebler Ventures
The decision to increase your company's capacity is critical and costly. Before making this leap, make sure it's the right decision for your company.
If you've reached the point where you're considering increasing your capacity, you've experienced some success.
When it comes to time to consider making major capital expenditures in order to increase capacity there are many issues to consider.
Too often small growing businesses strap themselves for cash making major business decisions that in the end may not have been necessary.
Increasing capacity is an important part of any growing business but there are times when it's just not necessary. Before you make these huge financial decisions, make sure you've exhausted all other options.
For some businesses increasing capacity means the purchase of additional equipment to help get your product or service out the door. This decision is usually justified by bottlenecks and output that under-paces demand. Purchasing a new piece of machinery should be justified with numbers, data and more numbers. You should calculate your various options in financial detail, including pertinent break even information. In addition, you should explore other options including additional shifts using your current machinery.
Once you've painted a complete picture with financial data, you can accurately determine the best option. Just because your machines are running at full capacity does justify making a huge financial purchase. Is it worth buying a $50,000 dollar machine if you're only operating 7% above capacity? These are answers you should know before purchasing new equipment.
In contrast to purchasing new equipment to increase capacity, you may seek to add another shift to your current schedule. By adding an additional shift, you avoid having to buy any new equipment. Similar to the purchase, however, you should calculate all of the costs involved with starting up a new shift. This cost should include increased overhead and insurance premiums as well as training and administrative costs.
It should also be noted that an additional shift would result in more wear and tear on your current equipment. This cost should be compared to the purchasing options. Once these numbers are compared and analyzed, the decision of an additional shift should become clearer. You cannot simply think 'buying a machine is expensive, let's run another shift instead' unless you have the numbers to support your logic.
One of the most difficult capacity decisions is when you believe you've outgrown your facility and need to move into another building. Before making this tremendous decision, be sure your demand is consistent and your environmental externalities are minimal. Once you've reached this point, chances are you've done your financial homework on the building. This can be deceiving though, you need to be sure that you've exhausted and explored all other options. These options should include shift expansion, outsourcing and new equipment purchases. The more information you have the more likely you will make the correct decision when it comes to expanding into a new facility.
How efficiently a company increases its capacity can make or break a growing business. A company, which jumps the gun and expands too soon, may find itself strapped for cash and buried in debt. A company, which waits too long, may forego fortunes in future sales.
There are huge stakes when it comes to increasing your capacity, so you want to be sure you've been as thorough and detailed as possible.
Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.
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