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Shailesh Sheth, Coporate Strategy Advisor

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Editorial War for capacities, the classic trade-off!!

Feb 21, 2018

The best supply chains are not just fast and cost-effective, they are also agile and adaptable, and they ensure that all their company’s interests stay aligned! — Harward Business Review

As India’s growth story regains momentum, the global economy is rebounding and with stock markets in a record bullish phase, it is imminent that demand for manufactured goods will grow too. In fact, after a dull investment cycle, it is expected that the capacity build-up would be the key to satiating exponential demand boom. Thus, one foresees a huge upsurge in need for capital goods and intermediate products.

This bullish phase will be different though. Looking forward, companies will not be competing with each other, but the entire supply chain will compete with one another. This is already visible in the automobile sector and will engulf all other sectors in no time. Thus, aligning complete supply chain ought to be No.1 priority for companies or else they will be left standing without key suppliers or vendors. The fight for capacity has already started.

One of the resultant effect of this unprecedented boom is the elongated deliveries, meaning that creation of the new capacities will take a much longer time whereas the demand will not wait. The gap will then be filled by competition and segments of market may be lost forever. In times, when demand outstrips supply, it is a sensible risk to create a capacity ahead of the demand curve galloping on an upward cycle. Time to do that is now!

In this war for capacities, one may have to jettison the idea of ‘core competence’ which drove many companies to become asset light and outsource production to vendors and suppliers. In order to corner capacities, companies are buying out key vendors. GE bought two 3D printer manufacturers, the Chinese company Midea bought Kuka Robotics – both to ensure that their own requirements were fulfilled first. We will hear more of this backward integration, which will become the order-of-the-day.

While we relentlessly pursue capacity enhancements, we have to weigh the risk factors too. Not so much a downward economic cycle, but more the factors such as disruptive technologies, shortened product lifecycles and fast-changing customer preferences, which can throw the entire supply chain out of track. What would happen with the advent of electric vehicles, 3D printers and so on is anybody’s guess. It suffices to say that a deft scenario planning exercise would be an essential part of homework to be done before embarking on significant capacity enhancement.

So, what is one saying?—It is a classic trade-off! If you don’t have a sufficient capacity, you miss the bus. If you create too much of it, you run the risk of overcapacity and disruption. So this is your call to make, and, you must make it…NOW!

This is a guest editorial feature by Shailesh Sheth, Coporate Strategy Advisor

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