Excess capacity

Each organization must have excess capacity to some extent. Examples are:

• if you are a store, you must have more items than a single item on the shelf per specific model
• If you are a manufacturer you need to be able to produce more than the steady flow of orders coming in
• If you are a consulting firm, you should have more consultants than the job at hand

The reasoning is straight forward - there are always some peaks in demand. Some due to market fluctuations, changes in taste, seasonality effects and some due to internal problems, shutdowns where recovery must be at faster speed than the normal one.

The picture below of the Twitter over capacity should not happen - this is bad for business

 

 

I am not delving into the question of how much excess capacity one needs. Let's use the rule of thumb of around 20%.

So far, all is logical. The question then becomes what to do with this excess capacity when it is not needed - this is the normal day to day life.

If the excess capacity is cheap then no one cares - it can sit idle. However, if this is expensive, then it better yield some results. I used to consult to a large steel manufacturer, and believe me the furnace does not stop its production for many good reasons.

A typical mistake is to keep all our resources simply busy since "idle is a waste." Without going into too many details, this is a grave mistake since it just builds inventory, wastes cash and consumes management attention.

The solution is to work on something that can

1. Bring in money
2. Resources can be available again on a very short notice or this cannot be called "excess capacity"
3. Does not tamper with the regular sales

One model I know of is Electric power. Power stations must have such excess capacity. They sell this capacity at a cheaper price and in order not to bring their regular price down it comes with a condition that they can disconnect this electricity immediately.

Today, I saw a very nice model at Amazon Elastic Compute Cloud . They definitely have excess capacity. The way they handle it is to sell what they call Spot Instances.


Spot Instance means that people bid on computation units. When amazon has spare capacity it brings the price down, when it starts running out of regular capacity, it brings the price up. As long as your bid is above the price you own the computation unit and when it is lower than the price your computation stops. Not only that, Amazon segments the price beautifully by letting people compete due to the bidding process.

This is brilliant and it serves real market needs. For example, suppose you are a researcher that just needs much computation, you care much about your cash and you could not care less when your computation happens, you can bid low and wait.

Think of your company, and think how to really utilize your excess capacity.

Amir