Managing capacity

Capacity is the maximum output a business can produce in a period with its current resources. Demand rarely matches it exactly, so capacity must be managed.

If capacity is too low (excess demand): work overtime, add a shift, hire temporary staff, subcontract (outsource), or invest in new plant. Outsourcing is fast and avoids fixed costs, but you lose control of quality.

If capacity is too high (excess capacity): rationalise (close a site, sell machinery, make redundancies), redeploy staff, or use the slack for maintenance and training. Or raise demand with promotion and price cuts.

Judgement: rationalisation cuts fixed costs permanently but is expensive up front (redundancy pay), damages morale, and is very hard to reverse if demand recovers. Temporary staff and subcontracting are reversible — that is their value.

Why hold inventory at all?

Inventory (stock) comes in three forms: raw materials, work in progress and finished goods.

• Benefits of holding stock: meet unexpected demand, cover late deliveries, allow production runs to continue, buy in bulk at a discount.
• Costs of holding stock: storage and insurance, the opportunity cost of cash tied up, obsolescence, theft and damage.

Stock control is the balance between these — too little and you lose sales (a stock-out); too much and you waste cash.

The inventory control chart

Key terms on the classic stock control diagram:

• Buffer (safety) stock — the minimum level held to cover delays or demand spikes.
• Lead time — the delay between placing an order and it arriving.
• Reorder level — the stock level that triggers a new order.
• Reorder quantity — how much is ordered each time.
• Maximum stock level — buffer stock + reorder quantity.

Your turn — reorder level

Your turn — maximum stock level

Economic order quantity (EOQ)

Ordering little and often keeps holding costs low but ordering costs high. Ordering rarely in bulk does the reverse. The economic order quantity is the order size that minimises total inventory cost — where the two curves cross.

Your turn — economic order quantity

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Sort the stock control terms

Tap a description, then tap the term it defines.

Supply chain management

The supply chain runs from raw materials, through suppliers and manufacturing, to distribution and the final customer. Supply chain management (SCM) co-ordinates it to deliver the right goods, in the right place, at the right time, at the lowest cost.

Choosing suppliers — the trade-offs: price, quality and consistency, reliability and lead time, capacity, financial stability, flexibility, ethics and sustainability, and location (near-shoring cuts lead time and carbon but usually costs more).

• Single sourcing — one supplier: stronger relationship, bulk discounts, consistent quality; but total dependence.
• Multiple sourcing — several suppliers: competition on price, resilience if one fails; but weaker relationships and variable quality.

Outsourcing, logistics and technology

• Outsourcing — paying another firm to carry out an activity (manufacture, IT, customer service). Converts fixed costs to variable, gives access to expertise, and lets the firm focus on its core competences. But it means losing direct control of quality, exposure to supplier failure, and reputational risk if labour standards are poor.
• Logistics — transport, warehousing and distribution. Costs and carbon rise with distance; e-commerce has made last-mile delivery a competitive battleground.
• Technology — EPOS and barcode data trigger automatic reordering; ERP systems link stock, production and finance; robotics and warehouse automation cut lead times.

Resilience vs efficiency: the lowest-cost supply chain (single source, offshore, zero buffer) is also the most fragile. After recent global shocks many firms have deliberately accepted higher cost — dual sourcing, near-shoring, some buffer stock — in exchange for reliability.

Match the supply chain term to its meaning

Tap a card on the left, then its partner on the right.

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Stock turnover and waste

A high stock turnover means stock is sold quickly: less cash tied up, less obsolescence — but a greater risk of stock-outs. A low turnover suggests overstocking, slow-moving lines or obsolete goods.

Compare only within an industry: a greengrocer turns stock over weekly; a jeweller may take a year.

Your turn — stock turnover

Ethical and sustainable supply chains

• Labour standards — pay, hours and safety at suppliers. An exposé of poor conditions damages the brand far more than the cost of fixing it would have done.
• Traceability — knowing where every component came from; increasingly demanded by regulators and investors.
• Carbon — long, complex supply chains carry a heavy footprint. Near-shoring cuts emissions and lead times but usually raises unit cost.

Judgement: a supply chain optimised purely for cost is fragile and reputationally exposed. The right balance depends on how visible the brand is, and how much customers care.

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