Notes:

Frequency of Capacity Additions There are two types of costs to consider when adding capacity: the cost of upgrading too frequently and that of upgrading too infrequently. Upgrading capacity too frequently is expensive. First there are direct costs, such as removing and replacing old equipment, and training employees on the new equipment.

In addition, the new equipment must be purchased, often for considerably more than the selling price of the old. Finally, there is the opportunity cost of idling the plant or service site during the changeover period.

Conversely, upgrading capacity too infrequently is also expensive. Infrequent expansion means that capacity is purchased in larger chunks. Any excess capacity that is purchased must be carried as overhead until it is utilized. (Exhibit 8.4 illustrates frequent versus infrequent capacity expansion.)

External Sources of Capacity In some cases, it may be less expensive to not add capacity at all, but rather to use some existing external source of capacity. Two common strategies used by organizations are subcontracting and sharing capacity. An example of subcontracting is Japanese banks in California subcontracting check-clearing operations to the First Interstate Bank of California's check clearinghouse. An example of sharing capacity is two domestic airlines flying different routes with different seasonal demands exchanging aircraft (suitably repainted) when one's routes are heavily used and the other's are not. A new approach to sharing capacity involves consortiums' time-sharing flexible factories. (See the Breakthrough--"Time-Share Manufacturing . ")