In the module, we will review:
- Capacity Assessment, management and planning
- Zoning management and polices
Capacity planning is of strategic importance and it is not an exact science. Different industries, product types, markets and product life stages each require a unique response. However, there are some common principles that can be kept in mind when conducting a capacity assessment.
A common miscalculation that results in an incorrect capacity assessment is the overestimation of demand and growth projections. In general, Marketing teams are optimistic in their product forecasting. Any estimations provided by the Marketing team need to be thoroughly vetted, against company history or other information available. If overly-ambitious projections lead to building manufacturing capacity that is then under-utilized, there will be a negative effect on the profitability of the manufacturing plant.
Another problem is having a realistic forecast of volume without having adequate information on how the product mix will break down. Senior management may have a focus on increasing overall sales and revenues without allowing appropriate concern for the product mix that will generate that revenue. Near-identical products with equivalent revenue and profit may be estimated together. Failure to get this mix right, however, becomes an operational issue as equipment production capacities need to be properly forecasted to ensure capacity can be met without undue hardship on equipment or personnel.
Similarly, the miscalculation can result from a difference in scope of work for a single product type with different packaging. For example, the company may expect to sell 10,000 boxes of crackers. However, they plan to have regional promotions in two of the ten geographies in which they operate. Each run of the promotional packaging will require a new set up. Not properly estimating quantities can reduce efficiencies and drive up costs even though the product and packaging costs are constant.
Having problems managing capacity is not unexpected – excellent forecasting work merely minimizes problems; it doesn’t eliminate them. The manufacturing management team need to have strategies in place to handle capacity concerns as they arise.
One method of managing capacity is standardization. If the goods manufactured are all standard, then it may be cost efficient to produce to forecasted goods in times of low demand to offset expected constrained manufacturing capacity in the near future. This works as long as the product is not perishable and has a shelf life that will not be significantly harmed by a period of inventory storage. While this method is the opposite of the popular just-in-time (JIT) system, this principle can help manage capacity providing there is room to store the product in house or in the channel.
For a temporary upswing in demand, excess production can take place through overtime. Adding second and third production shifts may work provided the staff is available and the equipment can operate without requiring daily downtime for maintenance or sanitation. Regular overtime use could result in the machinery having a shortened life cycle or needing more frequent repairs, so this also needs to be factored into any calculation. There may be times that it is possible to outsource work but that could reduce competitiveness, by sharing a specific product formulation with another party, or the financial benefit of meeting demand may be offset by the costs of transporting raw materials and validating the production quality. Similarly, with overtime, tired workers may not be as productive as workers employed only standard hours and then the additional “time and a half” pay may erode profitability. Workers may also make more errors, which can increase the cost of quality control and generate wastage.
A very unpopular method of managing capacity is to refuse orders. Any manufacturing organization will find it difficult to refuse orders, especially from a key customer. If there is no capacity to produce the good, though, it is best to refuse the customer at the time of order and explain why. Accepting the order, trying to find a way to meet demand and failing, and then telling the customer can cause problems for that customer’s customers and will harm the business relationship, possibly jeopardizing future orders as well.
Capacity requirements can also be linked to the life cycle stage of a product. If a product is set to be discontinued, if specialized equipment fails and would require costly repairs or replacement, the value of investing in that equipment cost may not generate any future return. In such a case, it might be best to end production sooner provided this does not result in failure to fill existing contracts.
A good capacity planner will allot extra capacity near the beginning of a product’s life cycle. When the product is first introduced, demand is generally fluid. Over-investing in manufacturing capacity may result in significant wasted capacity. As well, as the product meets the market, changes to formulation or production process may need to happen.
Overcapacity can also lead to unhealthy competition. If an organization chooses to produce extra goods because they have the capacity and then trust that promotion will help move the product, this can reset the customer’s price expectation. If customers do not purchase even with a price or other incentive, then there may be disposal costs for excess goods.
Capacity can sometimes be increased by investments in new technology and processes. The value of doing so is generally good near the beginning or peak portions of a product life cycle. The investment value may decrease as the product nears an end of life stage; at this point, new investments need to be considered and evaluated against use for production of other existing or upcoming products.
There may be times when an organization has multiple production facilities and would like to use an underutilized facility to produce an item which has experienced unexpected demand. There are questions that need to be asked in this scenario. First, is it geographically feasible? Can the materials be transported to the alternate facility, processed, and then transported to the appropriate channel or retail partners in an economically viable way? Second, does the second manufacturing facility meet all the same standards? A third consideration could be whether or not the staff at the alternate facility possesses the necessary skill set to take on the work. If the labour needs to be trained or staff from the first plant needs to relocated, that is another additional cost element to take under consideration.
There are three elements that combine to define the flexibility of a manufacturing facility. Those elements are:
Product Mix: When a manufacturing facility has a small mix of products, capacity is more easily forecasted and managed. As the product mix for the facility grows, the capacity decisions generally become more complex. As a company’s product lines grow, a decision needs to be made as to whether growth will be handled in house, temporarily (or long term or permanently) through a third party or if an investment in a new production facility will be made.
Product Volume: Seasonality or other market conditions could result in a product that has repeated, predictable fluctuations in supply availability or demand volume. With proper research and seasoned staff, manufacturing operations should be well able to plan capacity to manage seasonal fluctuations. Market based fluctuations due to increased competition or supply constraint are more difficult to manage.
Competitive Considerations: There are organizations that strategically invest in high capacities with the goal of having their own capacity act as an entry barrier against new competitors. The high capacity may allow lower production costs and thus a lower price for the consumer. The hope will be that competitors will not be able to match that price. There is, however, a risk that the capacity can become an exit barrier if the market does not prove to be profitable or supply constraints prevent the maximization of capacity. The equipment might not easily be converted to other product manufacture.
There are some benefits attributed to creating large capacities beyond acting as a barrier to competitors. In some volume based manufacturing industries, doubling the capacity of a container may result a three time larger output. In general, however, it is better to increase the capacity of a plant through efficiency improvements rather than size or wholesale equipment replacement.
When an company decides on the creation of a new manufacturing plant, one of their first considerations is proximity to suppliers, to customers and to transportation. Once that has given them an idea of suitable locations, it is necessary to consider zoning regulations that may limit the location, type of business or other operational constraints.
Zoning may limit the size of a given operation. While current business demands may fall within the zone parameters (i.e. interior floor area not to exceed 4000 square meters), that restriction may limit future growth. There could be rules around parking, noise or loading space for truck traffic that could impede operations.
Municipal zoning restrictions depend on location of the municipality, and to some degree on the rules in place in the province. Urban municipalities generally have the greatest concern for public health related concerns and engage in food inspection activities. Urban municipalities also have an effect on food distribution through zoning policies which may determine food store and food company locations.
In the case of rural municipalities, those municipalities have greater direct impacts through their zoning, and property tax decisions. Restrictions on size of operations or other limitations can hinder a company from growing. If the municipality is not otherwise healthy, there can also be a negative effect on the available labour market.
Use of zoning to protect agricultural land loss
Manufacturers must meet municipal zoning requirements before building a manufacturing facility (or purchasing a property to be retrofitted). A proposal to build a new operation or to expand an existing facility could result in hearings to assess environmental impacts prior to construction. This can be a costly and time consuming process and will likely involve legal advice.
Consider the example of a brewery. Breweries use substantial amounts of “wash water” in their production process. This water must be adequately cleaned after use to ensure it does not include organic material which could pollute streams and water tables after discharge. The province and municipality which will house the brewery must be satisfied that systems are being put in place for the waste water treatment.
It is essential that a potential location is appropriately zoned for the operations that are planned for the short term and that may reasonably be expected to develop in the mid- to long- term. The municipal office for the area is the best place to look for advice on zoning as well as any applicable by-laws. They will be able to confirm the existing zoning of any site under consideration as well as warn of any requested or planned zoning changes that may affect operations.
If the desired area for operations is not appropriately zoned, it may be possible to approach the municipal council to request consideration for rezoning. (This is only likely to happen if there is no other viable location within the municipality. Local economic development officers are a valuable source of information and assistance in navigating zoning, bylaws and even health and safety regulations.
A Growing business often needs external sources of funding to procure necessary equipment to facilitate growth. Cash on hand may not be sufficient. Bank loans may be a possibility but there are some other sources of funding that qualified food producers may be eligible to obtain. A partial list of organizations is provided here:
Federal Programs and Sources of Financial Assistance
Program / Organization Description Source
Aboriginal Capital Commission
ACOA Atlantic Innovation Fund
ACOA Business Development Program
Business Development Bank of Canada
Business Development Bank of Canada – Innovative Financing To help innovative businesses take advantage of new markets and technologies. SME focused. www.bdc.ca
Canada Small Business Financing Program – To help entrepreneurs across Canada access financing for establishing, expanding, modernizing and improving small business. www.ic.gc.ca
Canada Small Business Financing Program – Capital Leasing Project – To help small businesses across Canada access lease financing for new or used equipment. www.ic.gc.ca
Canada Revenue Agency – Provides direct funds and/or tax credit grants for encouraging businesses to conduct research and development in Canada that will lead to technologically advanced products and services. www.cra-arc.gc.ca
Community Business Development Corporations – Supported by ACOA. Assists in creation of small
businesses and expansion, modernization and stabilization. Atlantic Canada. www.cbdc.ca
Export Development Canada – Provides commercial financial solutions to companies of all sizes to help them succeed in the global marketplace. www.edc.ca
Innovation and Knowledge Fund – Objective is to work with other investment programs to contribute to the achievement of the regional economic development objectives, especially broadening the economic base and strengthening Northerners’ ability to take advantage of economic opportunities. www.ainc-inac.gc.ca
Internship Program with Innovative Small and Medium Enterprises – Provides financial assistance to innovative SMEs for the hiring of post-secondary graduates to work on innovation projects. Under IRAP program. www.irap-pari.nrc-cnrc.gc.ca
NRC – Industrial Research Assistance Program (IRAP) – Industrial Research Assistance Program provides contributions to SMEs interested in growing using technology to commercialize services, products and processes in Canadian and International markets. www.irap-pari.nrc-cnrc.gc.ca
Planning and Investment for Value-Added Enterprises – Helps cover the cost of hiring a business planning professional who will assist in developing a feasibility assessment or business plan related to your value-added business opportunity. www.agr.gc.ca
Service Canada – National Career Focus – Provides financial support to Canadian employers
and organizations to provide post-secondary graduates with career related work experience in Canada to help them acquire advanced employment skills and to become leaders in their field. www.hrsdc.gc.ca
Service Canada – Targeted Wage Subsidy – Available to employment insurance eligible individuals who have difficulty finding work due to employment barriers. www.hrsdc.gc.ca
Small Business Funding Centre Provides grants and loans to Canadian small businesses. www.grants-loans.org
Western Economic Diversification Canada – Responsible for promoting the development and
diversification of the western economy. Includes assisting SMEs prepare for exporting, through information, training, planning, and trade financing. www.wc.gc.ca
Workplace Skills Initiative – Provides financial assistance for training and education of staff. $3 million a year. Completion 2010. www.entreprisecanada.ca
Specific provincial programs
Some provinces may offer additional funding or other assistance programs. There may be assistance, particularly if the organization is headed by young entrepreneurs, aboriginal entrepreneurs or women through the provision of loans or grants. See these links for additional information. Lin 1 and Link 2.
In the early phases of product development, production facilities and capabilities need to be kept in mind. Considerations will include:
- where you plan to sell your product
- availability of facilities in your community
- amount of money you have to invest in buildings and equipment
- long range plans for growth