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When managing capacity to meet predictable variability, firms use a combination of the following approaches:
• Time flexibility from workforce: In this approach, a firm uses flexible work hours from the workforce to manage capacity to better meet demand. In many instances, plants do not operate continually and are left idle during portions of the day or week. Therefore, spare plant capacity exists in the form of hours when the plant is not operational. Many plants do not run three shifts, so the existing workforce could work overtime during peak periods to produce more to meet demand. If demand fluctuates by day of the week or week of the month and the workforce is willing to be flexible, a firm may schedule the workforce so that the available capacity better matches demand. In such settings, use of a part-time workforce may further increase the capacity flexibility by enabling the firm to have more people at work during peak periods.
• Use of seasonal workforce: In this approach, a firm uses a temporary workforce during the peak season to increase capacity to match demand. This approach may be hard to sustain if the labor market is tight.
• Use of subcontracting: In this approach, a firm subcontracts peak production so that internal production remains level and can be done cheaply. With the subcontractor handling the peaks, the company is able to build a relatively inflexible but low-cost facility where the production rates are kept relatively constant (other than variations that arise from the use of overtime). Peaks are subcontracted out to facilities that are more flexible. A key here is the availability of relatively flexible subcontractor capacity. The subcontractor can often provide flexibility at a lower cost by pooling the fluctuations in demand across different manufacturers. Thus the flexible subcontractor capacity must have both volume (fluctuating demand from a manufacturer) as well as variety flexibility (demand from several manufacturers) to be sustainable.
• Use of dual facilities–dedicated and flexible: In this approach, a firm builds both dedicated and flexible facilities. Dedicated facilities produce a relatively stable output of products over time in a very efficient manner. Flexible facilities produce a widely varying volume and variety of products but at a higher unit cost. Each dedicated facility could produce at a relatively steady rate, with fluctuations being absorbed by the flexible facility.
• Designing product flexibility into the production processes: In this approach, a firm has flexible production lines whose production rate can easily be varied. Production is then changed to match demand. The production lines are designed such that changing the number of workers on a line can vary the production rate. As long as variation of demand across different product lines is complementary, (i.e., when one goes up, the other tends to go down), the capacity on each line can be varied by moving the workforce from one line to the other. Of course, this requires that the workforce be multi-skilled and easily adapt to being moved from line to line. Production flexibility can also be achieved if the production machinery being used is flexible and can be changed easily from producing one product to another. This approach can only be effective if the overall demand across all the products is relatively constant. Several firms producing products with seasonal demand try and exploit this approach by carrying a portfolio of products that have peak demand seasons distributed over the year.
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