Escom-coping with runway capacity needs

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Reference no: EM131106821

ESCOM-COPING WITH RUNWAY CAPACITY NEEDS

ESCOM is a producer of electronic home appliances, including VHS (Video Home System) television recorders, located in northern California. The packaged product weighs about 75 kg. ESCOM was not the innovator of the system. Rather, its managers sat back and let RCA and others develop the market, and ESCOM is currently producing under license agreements. ESCOM has a conscious strategy of being a follower with new product innovations. It does not have the financial resources to be a leader in research and development. ESCOM's present opportunity is indicated by the fact that industry sales of VHS recorders have increased 30 per cent per year for the past two years, and forecasts for the next year and the two following are even more enticing. ESCOM has established a 10 per cent market share

position and feels that it can at least maintain this position if it has the needed capacity; it could

possibly improve its market share if competitors fail to provide capacity at the time it is needed.

	Year
	0	1	2	3	4	5
Forecast, 1000 Units	100	140	195	270	350	450
Capacity (gap), or slack 1000 units	5	(35)	(90)	(165)	(245)	(345)

The forecasts and capacity gaps are indicated in Table. ESCOM regards the first year forecast as being quite solid, based on its present market share and a compilation of several industry forecasts from different sources. It is less sure about the forecasts for future years, but it is basing these forecasts on patterns for both black and white and color TV sales during their product life cycles ESCOM's VHS model has a factory price of Rs 600. Variable costs are 70 percent of the price. Inventory carrying costs are 20 per cent of inventory value, 15 percentage points of which represents the cost of capital. ESCOM's facility planners estimate that a 40,000 unit plant can be built for Rs. 5 million and a 200,00 unit plant, for Rs. 10 million. Land and labour are available in the area, and either size plant can be built within a year.

(a) What capacity plans do you think ESCOM should make for next year? Why?

(b) What longer-term capacity plans should ESCOM make? Why?

Reference no: EM131106821

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