Capital Linearity
A philosophy for designing and buying production machinery so that small amounts of capacity can be added or subtracted as demand changes. In this way, the amount of capital needed per part produced can be very nearly level (linear).
For example, in capacitizing for 100,000 units of annual output, a manufacturer might purchase a series of machines, each with an annual capacity of 100,000 units, and link them in one continuous flow production line (first alternative). Alternatively, the manufacturer might buy 10 sets of smaller machines to install in 10 cells, with each cell having annual capacity of 10,000 units (second alternative).
If the forecast of 100,000 units proved to be exactly correct, the single line with 100,000 units might be the most capital efficient. But if real demand is different, the second alternative offers distinct advantages:
- Whenever demand goes beyond 100,000 units, the manufacturer can add either another line with 100,000 units of capacity or just the required number of cells, each with 10,000 units of capacity, to satisfy the higher demand. By adding cells, the capital investment per unit of output would vary only slightly with changing demand. It would be very nearly linear.
- Whenever the real demand is less than 100,000 units, a more serious problem arises. The first alternative makes it almost impossible to decrease capacity and maintain efficiency at the current level. However, the second alternative allows the manufacturer to subtract capacity by shutting down as many cells as required.