Size of units facilities Free Essay Example

Economies of scale

Scale economies are based on the notion that large units are more economical because fixed costs can be spread over more units of production.

The company may consider using a large unit of capacity in two cases: Firstly if the cost of building and operating large production equipment does not increase linearly with volume. A machine with twice the output rate generally costs less than twice to as much to buy and operate. Also, in larger facilities the overhead due to managers and staff can be spreads over more units of production.

As a result, the unit cost of production falls as facility size increases, when scale economies are present. Diseconomies of scale: “Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs.” These occur as the facility gets larger for several reasons. Firs, there are transportation diseconomies present. For e. g. , a large facility incurs more transportation costs than two smaller facilities that are closer to their markets.

Pre-empt the competition strategy

Diseconomies of scale also occur because communications, co-ordination, and control costs increase in large bureaucratic organizations. As more layers of staff and management are added to manage the organization, the cost ultimately increases faster than the output level. Furthermore, costs of complexity and confusion arise as more products are added and facility becomes larger. Pre-empt the competition strategy: This is the optimal strategy for the company as the firm will lead the market by building capacity in advance of the need.

This strategy tends to provide a positive capacity cushion; it may actually stimulate the market and could prevent competition from coming in for a while. Wait and see strategy: (As in the case of Greastex) the firm is waiting to add capacity until demand develops and the need is clear. As a result, the company would be following the leader and is taking a low risk strategy. A small or negative capacity cushion could develop, and a loss of potential market share may result.

Product-focused facilities

Product-focused facilities (optimal strategy for greastex): produce one family or type of product, usually for a large market. Product-focused plants are generally used when transportation costs are low or scale economies are high. This tends to centralize facilities into one location or a few. Market- focused facilities: are located in the market they serve. Many service operations fall into this category since services cannot be transported. Plants that require quick customer response or customized products or that have high transportation charges tend to be market-focused.

International facilities also tend to be market-focused because of tariffs, trade barriers, and potential currency fluctuations. Process-focused facilities: have one technology, or at most two. These facilities frequently produce components or parts that are shipped to other facilities for further processing or assembly. Process plants can also supply plants outside the company, and they can make a wide variety of products within the given process technology.

Process-focused facilities

Process-focused facilities are not widely used compared with product or market facilities, but they are nonetheless important in certain cases. General-purpose facilities: may produce several types of products and use several different processes. They tend to be used by thousands of small companies that do not have sufficient volume to justify more than one facility. Larger companies usually specialize their facilities according to product, market, or process. The disadvantage of a general-purpose facility, of course is that it can be unfocused, unless a plant-within-a-plant strategy can be used.