Sizing Overseas Capacity Before the Peak Is Known
Every Mix of Capacity and Sales Scored Before the Capital Goes In
A consumer electronics manufacturer has to commit capital to overseas component capacity before it knows how big the product will be. Lead times run three to six months, and the product line has a two-year life cycle. A simulation of the supply chain crosses three capacity levels with three sales outcomes. It shows the cost of guessing wrong in either direction before the money is spent, and tests what flexible ordering and expediting can win back.
- The business
- A consumer electronics manufacturer
- The question
- How much component capacity to commit before demand is known
- The model
- Overseas component plant, ocean freight, assembly, distribution, over the full product life cycle
- What it is worth
- The cost of over- and under-committing capacity, seen before the commitment
- Source
- SDI project record
What the company is up against
Key components are made overseas and shipped to an assembly plant, which feeds the distribution centers. The plan allows 30 days for loading, ocean transit and unloading, including customs. SDI works with the company on three problems that fed into each other:
- Demand is hard to forecast. Both the total and the peak of a two-year consumer electronics life cycle are uncertain, and monthly peak sales are what size the plant.
- Capacity has to be committed in advance. The life cycle is too short to add capacity once the market shows how strong demand really is.
- Lead times are long. At three to six months, short-term surprises have to be covered by a large safety stock at the assembly plant, and that inventory costs money every month it sits there.
Undersize the plant and the company has to prebuild stock and can still miss orders. Oversize it and the extra capital would eat into the product’s profit.
How it is modeled
The model follows components from the overseas plant through shipping, assembly and distribution to customer inventory. Its inputs are combinations of life-cycle demand and forecast. Three capacity commitments are crossed with three ways actual sales can turn out, including the one where the forecast is right.
When demand runs over capacity, the only way to cope in the model is to prebuild stock ahead of the peak. Every combination is simulated through the life cycle and scored on capital equipment cost, prebuild cost and total shipping cost. Each is also scored on inventory at the overseas plant and the assembly plant, and on customer service.
What the model shows
What each combination does
| Sales A (high) | Sales B (medium) | Sales C (low) | |
|---|---|---|---|
| Capacity 1 (high) | Moderate prebuild during peak | No prebuild; capital somewhat excessive | No prebuild; capital very excessive |
| Capacity 2 (medium) | Massive prebuild during peak | Moderate prebuild during peak | No prebuild; capital somewhat high |
| Capacity 3 (low) | Capacity cannot keep pace with sales | Massive prebuild during peak | Moderate prebuild during peak |
Idle capital Moderate prebuild Massive prebuild Lost sales
Even where capacity matches the forecast peak and sales come in on forecast, the model still shows a moderate prebuild during the peak. Each step of under-commitment turns into more inventory built and paid for ahead of the peak, until the lowest capacity can’t keep pace with high sales at all. Over-commitment avoids prebuilding and pays in idle capital instead.
What flexible ordering and expediting are worth
With capacity fixed, the model tested two ways to live with forecast error.
Flexible ordering
If the assembly plant could adjust its orders closer to the time of need, it could hold less safety stock against the long lead times. The model asks how much flexibility is enough, since flexibility helps the customer but adds cost for the supplier.
Expedited shipments
Air freight answers an unexpected demand spike faster than a month at sea. The model weighs combinations of flexible ordering and expediting by what they do to inventory and customer service, and counts the extra shipping cost.
What changes
The company can weigh its capacity commitment against the full grid of outcomes, with the consequences of each wrong guess assessed before the capital is committed. Flexible ordering becomes the main tool for cutting the large safety stock at the assembly plant.
The same kind of decision turns up well beyond electronics, anywhere capacity has to be committed before demand is known and the peak sizes the plant. A seasonal product, a limited-time flavor or a launch with a short window all raise it.
Modeling this kind of supply chain in ReliaSim®
ReliaSim’s supply chain modeling represents the sites, lanes, demand, inventory and ordering behind this question in one model. The simplest version of that chain, a supplier feeding a plant feeding a customer, runs in the browser.
Built by Simulation Dynamics, the team behind ReliaSim, on a commercial simulation platform · source: SDI project record.
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