Course: Operations Management: A manufacturer of electronic accessories for use in computers currently has a capacity of 40,000 pieces per month.

Course: Operations Management:

A manufacturer of electronic accessories for use in computers currently has a capacity of 40,000 pieces per month. The business strategy group for the company recently performed a forecasting exercise to assess the emerging demand for the accessories in the next five years. The study revealed that there is a 40 per cent probability that the growth in demand for the accessories will be strong during this planning horizon and a 60 per cent probability that the growth in demand will be moderate. The study identified three options for the manufacturer to augment capacity. Option 1 is to expand the capacity by adding new capacity to meet the demand. Option 2 is to augment capacity in the existing factory itself by some de-bottlenecking operation (in which case there will be limits to capacity expansion. Option 3 is to go for subcontracting. If there is a strong growth in demand, then the new capacity could be added a year later. The study revealed the following additional information about the emerging scenario and the costs and benefits of each of the alternatives:

   1.    The cost of adding new capacity is INR 750,000. This cost goes up by 4 per cent if it is deferred by a year.

    2.    The cost of expanding in the existing factory itself is INR 275,000.

    3.    The cost of subcontracting is negligible, as no major investments are envisaged either at the supplier side or at the manufacturer side.

   4.    The revenue accruing from new capacity is as follows: If it is a strong growth, the revenue will be INR 850,000 and in the case of a moderate growth, the revenue will be INR 400,000. These figures do not change even if the new unit comes into operation a year later.

   5.  he revenue accruing from the expansion of the existing capacity is as follows: if it is a  strong growth, the revenue will be INR 550,000 and in the case of a moderate growth, the revenue will be INR 300,000.

   6. The revenue accruing from the existing factory with subcontracting is as follows: If there is strong growth, the revenue will be INR 350,000 and in the case of moderate growth, the revenue will be INR 180,000. 

Arrive at an appropriate capacity planning strategy using a decision tree.

All revenues are yearly figures.