ESCOM-COPING WITH RUNWAY CAPACITY NEEDSESCOM 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 andothers develop the market, and ESCOM is currently producing under license agreements. ESCOMhas a conscious strategy of being a follower with new product innovations.
It does not have thefinancial resources to be a leader in research and development.ESCOM's present opportunity is indicated by the fact that industry sales of VHS recordershave increased 30 per cent per year for the past two years, and forecasts for the next year andthe two following are even more enticing. ESCOM has established a 10 per cent market shareposition and feels that it can at least maintain this position if it has the needed capacity;
it couldpossibly improve its market share if competitors fail to provide capacity at the time it is needed.Year0 1 2 3 4 5Forecast, 1000 Units 100 140 195 270 350 450Capacity (gap), or slack 5 (35) (90) (165) (245) (345)1000 unitsThe forecasts and capacity gaps are indicated in Table. ESCOM regards the first yearforecast as being quite solid, based on its present market share and a compilation of severalindustry forecasts from different sources.
It is less sure about the forecasts for future years, butit is basing these forecasts on patterns for both black and white and color TV sales during theirproduct life cycles.ESCOM's VHS model has a factory price of Rs 600. Variable costs are 70 percent of theprice. Inventory carrying costs are 20 per cent of inventory value, 15 percentage points of whichrepresents the cost of capital. ESCOM's facility planners estimate that a 40,000 unit plant canbe built for Rs. 5 million and a 200,00 unit plant, for Rs. 10 million. Land and labour are availablein 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?
(c) What are the implications of these plans for marketing, distribution, and production?