What actions can Chipset’s management take when it identifies unused capacity? In general, it has two alternatives: eliminate unused capacity or grow output to utilize the unused capacity.
In recent years, many companies have downsized in an attempt to eliminate unused capacity. Downsizing (also called rightsizing) is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future. Companies such as AT&T, Delta Airlines, Ford Motor Company, and IBM have downsized to focus on their core businesses and have instituted organization changes to increase efficiency, reduce costs, and improve quality. However, downsizing often means eliminating jobs, which can adversely affect employee morale and the culture of a company.
Consider Chipset’s alternatives for dealing with unused manufacturing capacity. Because it needs to process 2,900,000 square centimeters of silicon wafers in 2020, the company could reduce capacity from 3,750,000 to 3,000,000 square centimeters at the beginning of 2020 (Chipset can add or reduce manufacturing capacity in increments of 250,000 sq. cm.), resulting in cost savings of $3,262,500 Chipset’s strategy, however, is not just to reduce costs but also to grow its business. So in early 2020, Chipset reduces its manufacturing capacity by only 250,000 square centimeters—from 3,750,000 square centimeters to 3,500,000 square centimeters—saving $1,087,500 It retains some extra capacity for future growth. By avoiding greater reductions in capacity, it also maintains the morale of its skilled and capable workforce. The success of this strategy will depend on Chipset achieving the future growth it has projected.