One of the most important factors to consider when encountering business growth is to ensure that capacity is strategically expanded to minimize the chaos that can accompany rapidly fluctuating demand. Unfortunately it often happens that companies apply more of a feast or famine approach, with little consideration to being strategic in planning and executing capacity. After all, once you make the sale you have to deliver.
Strategic or Trailing Capacity
Which of these most closely mirrors your organization?
Strategic Capacity exists when targeted growth is primarily planned through the expanded utilization of existing resources and strategic relationships. Hiring and firing of staff is a last resort in this model. Instead, organizational focus and energy is used to find means to improve process throughput, maximize the performance of talent, pursue and invest in strategic relationships and fully integrate technology and resources to enhance efficiency.
One such organization is a valve company with which I work. Although this is a relatively small operation, they have strategically developed joint ventures to support capacity fluctuations. This allows them to service a global market despite the fact that they own only two facilities, one in Wisconsin and one in China. With a workforce of employees that have in excess of 25 years experience, it’s clear that this company’s capacity planning and fulfillment is strategic.
At the opposite end of the spectrum we have what I call Trailing Capacity. In instances where Trailing Capacity exists, companies are unwilling to invest time or resources based on predicted capacity fluctuations. Instead they wait for capacity changes to materialize before they respond, creating significant organizational churn and chaos. As you would expect, Trailing Capacity leads to unfavorable outcomes such as reduced throughput speed and quality; lack of employee loyalty and in extreme circumstances a loss of customer revenue.
Analyze the opportunities to be more strategic relative to capacity as you examine your own organization. Then, consider the two fundamental components of organizations which use a strategic capacity model.
Growth Must Be Predicted AND Validated
A couple of years ago I met with a valve manufacturer in North America to discuss their challenges in consistently meeting customer demand. Their complex manufacturing process was supported through inventory derived from a number of suppliers positioned globally, resulting in extensive lead times and delays in meeting committed customer delivery dates.
There was a desire to pre-manufacture components to minimize lead-time; however sales forecasts had been wildly inaccurate, resulting in dramatic fluctuations in inventory levels. It became clear that all forecasting data derived from sales predictions was, even at the best of times, 10% to 20% high. The solution was to create a model to collect, validate and integrate forecasting information to allow for better inventory planning. A simplified version of the formula is as follows:
Long-term Demand Opportunities
Plus Targeted/Strategic Demand Opportunities
Less Risk adjustment factor (-10 to 22%)
Less Historic demand adjustment factor (determined from historic forecast accuracy)
= Validated Forecast Demand
How are you collecting and validating forecast information to allow for planned capacity?
Invest Before it’s Too Late
Just the word “capital” is enough to make many CFOs and presidents shudder. In my experience many organizations delay capital investment until opportunities have materialized (an element of the Trailing Capacity model). To prepare to leverage growth opportunities requires both leadership and investors who are willing to invest in the integration of new equipment and technology before the opportunities materialize.
A client recently purchased their business back from an investment firm after several years of fighting to attain financing for growth. The investment firm was unwilling to invest until they witnessed clear returns. As a result, the leadership team began to purposefully avoid growth opportunities, knowing full well that they would be unable to be proactive in meeting the customer’s expectations. Sales began to decline, and pressure from the investment firm of course began to rise.
The leadership team decided to purchase the business back from the investment firm, despite the premium to do so, as they knew that investment came before growth. It’s the old “if you build it they will come” philosophy. Several years later they have now moved into a new larger facility, have expanded operations across North America and nearly doubled their revenues. Is your organizational leadership prepared to invest in growth before opportunities materialize?
Preparing for growth requires a significant amount of time be spent on identifying forecasted opportunities, and determining how to strategically adapt capacity to meet demand fluctuations. Introducing strategic capacity and the methods that support development of such will ensure that increases in capacity are well planned and effectively executed. Then again, you can simply wait and see what happens…
This article is the second of a three-part series on "Preparing for Growth."