Business Scale, Capacity Planning and Inactive Capacity

17 June 201514 min reading
In many parts of the world, several industries have problems about capacity usage. Turkey is one of these countries, especially in flour milling. It is stated that capacity usage in milling is around 90 percent in USA and almost 100 percent in England. World average is around 65 percent. In Turkey, this is barely 45 percent. Total flour milling capacity of Turkey is 3 times more than its own consumption amount. This also shows an uncontrolled growth in Turkish flour industry and inability of investors in scale and capacity planning. kapakProduction capacity which is one of the criteria for production capability of a business is defined as production amount that a business reaches by using available production elements rationally in a specific time. Business scale - size of a business – is described as volume of all the means of production that are gathered by an enterprise. In general, businesses are characterized as large, medium, small or micro businesses in terms of various criteria such as the number of employees, annual turnover and balance value. Production capacity is also one these significant criteria. It is possible for businesses to work 8, 16 or 24 hours a day. Dr. Zeki Atıl Bulut, lecturer at Dokuz Eylül University, states in his article about capacity planning that a plant working 8 hours a day should be three times larger than a plant working 24 hours a day in order to reach a specific production level. Similarly, production activity of a plant may continue 5, 6 or 7 days a week. According to Dr. Bulut, the more working hours increase, the less machinery equipment is needed to reach a specific production level. In addition, intense work in a small plant makes general expenses per unit decrease. However, both production capacity and business scale are accepted as interconnected and complementary elements in terms of business efficiency, continuity and profitability because businesses require an adequate capacity and adequate business size in order to meet available and future demands in consistence with its strategic missions and in terms of time and space. IMPORTANCE OF CAPACITY PLANNING Capacity determining the response rate of production system to the market also determinates not only cost structure, resource productivity, technology level, stock policy, manpower requirements and also service level to be offered to the customers. In addition, it is a significant factor affecting the programming activity and it creates constraint over decisions about production/operations management. For instance, a production amount to be reached economically in a specific time period is also a limiting factor for a short-period production planning. Dr. Zeki Atıl Bulut explains the results of an ill-planned capacity planning and the importance of capacity as follows: “Capacity levels which are determined as higher or lower than adequate cause some problems. It is possible for an airline company to select a capacity high enough to meet the demands for festive holiday period when the demands are highest. In this situation, however, the capacity of planes and personnel will not be used most of the time. In other words, sources will remain inactive. On the other hand, a capacity to meet the minimum demands will keep the usage level of the plants high and enhance the return on investment. This capacity level, however, will cause the demands be unreturned in specific times and this cause customer dissatisfaction; some part of the customers will be lost; market share will decrease and competence power of the business will also decrease. Under the pressure for increasing the volume, inadequate capacity is likely to influence the quality negatively.” Stating capacity and production planning affect each other but they are also different from each other, Dr. Bulut emphasized: “It seems that capacity and production programming activity do not diverge in practice. Mistakes made during production programming are received as a capacity problem; inadequate capacity always creates difficulties in programming. In fact, capacity is all about having productive sources; production programming, however, is about scheduling the use of them. Capacity decisions are quite related with the strategic decision about the technology to be used and it needs large capital investment. Additionally, in businesses, investing to increase gaining is accepted as an important criterion. Thus, costs caused by capacity planning decisions and gaining should be evaluated carefully.” HOW TO DO CAPACITY PLANNING? Capacity planning is an important concept to be considered for businesses because businesses can only make production through their capacity size. Thus, they can only make sales in accordance with their capacity and make profit. İn addition, businesses should also use their capacity in an optimum level. This is only possible with a well-planned capacity management. Saying “Capacity planning is used for determining the capacity to be used by businesses in specific time period”, Dr. Zeki Atıl Bulut emphasizes that making an incorrect plan expose businesses the problem of inactive or inadequate capacity; in this case, productivity and so the profitability of a business will not reach to the targeted level. Stating that while making capacity planning estimated sales amount of the business should also be considered as well as available capacity and planning should be made according to these measurements, Dr. Zeki Atıl Bulut explains the points to be considered for a correct planning as follows: “Businesses should determine the optimum capacity level and strategic business plans in accordance with the determined capacity level. Business managers are closely interested in capacity concept for various reasons. First of all, they need capacity planning for meeting available and future demands. Secondly, maintenance costs of available machines and business flow are closely related with production capacity; and also this influences production efficiency too. Thirdly, production capacity should already be known in order to make a profitable investment. Business managers should make their capacity selection in order to realize a rational investment and balance the costs of investments and investment income. Capacity planning activity requires three questions to be answered. These are: 1. What kind of capacity is needed? 2. How much capacity is needed? 3. When is it needed? Definitely, capacity selection is made in a newly founded company. However, capacity change should be considered in an operating company too. İn this aspect, while making capacity planning it is important to include these activities: evaluation of available capacity; estimation of future capacity level, determination of the elements influencing the capacity; comparison and contrast the financial, economic and technologic evaluation of capacity alternatives; capacity selection in accordance with the business targets.” Dr. Zeki Atıl Bulut mentions the elements influencing the business capacity in his article and states: “Business managers should consider the elements influencing the capacity selection in order to make proper investment decisions. Primary elements determining the proper capacity usage in businesses are these: costs, demand amount, financial numbers, foundation place, technical opportunities, working time, management and other elements." INACTIVE CAPACITY PROBLEM AND TURKEY In many parts of the world, several industries have problems about capacity usage. Turkey is one of these countries, especially in flour milling. According to a chart showing grain-based business operating in Turkey and prepared by Turkish Grain Board (TMO), there are 724 flour plants, 23 pasta factories, 402 feed factories, 13 semolina, 33 biscuit, 90 bulghur and 7 starch businesses in Turkey. Of these 724 flour plants, installed capacity is 36 million 360 thousand tons. However, 18 million 156 thousand tons of this capacity is inactive. ın other words, only in flour industry, inactive capacity is 49.9 percent. “The difference between production capacity and consumption amount is 23 million tons” Inactive capacity problem of Turkish flour industry has been mentioned for years by industry members. However it has not been solved yet. E. Günhan Ulusoy who was the Head of Black Sea Flour Industrialists’ Association then and has been appointed as the Head of Turkish Flour Industrialists Association mentioned about the inactive capacity problem in Turley and its effects on the market in November 2013: “Total production capacity of flour plants that produce the raw material of bread which is essential for nutritional habits of Turkish families is around 40 million tons. However, annual flour production amount in Turkey is 15 million tons. Our flour export amount which makes us number one in the world is 2 million tons. İn other words, the difference between production capacity and consumption amount is 23 million tons. As we all know, we, the industrial enterprises operating in flour production industry in our country are in a great competition. Besides having flour plants more than adequate, anybody has a right to set up a flour factory in anywhere. This makes the competition conditions more difficult for industrialists who have also difficulties in finding consumers for their flour at affordable price and market them face a complicated situation. Thinking that the production volume of available flour plants in Turkey is 40 million tons and taking account that consumed and exported flour amount in our country is 20 million tons, we can see that inactive capacity is as near as used capacity, namely 20 million tons.” “Available capacity is 7.5 million tons more than global flour export” Dr. Birol Akgün, Lecturer at Selçuk University, Faculty of Economics and Administrative Sciences, touched on the same subject in his speech given to Anadolu Agency in June 2010. Stating that mills have spread even to the smallest towns in Turkey which has been a major wheat producer and consumer for so long, and transition from mills to plants in flour production is realized fast, Akgün states that stone mills that were more than 40 thousand in number before 1950, and flour plants with high capacity increase in number rapidly. Reminding that DPT (State Planning Organization) ended the incentives for investments in flour production in 1983 due to the fact that increasing number of factories create inactive capacity problem, he speaks: “However incentives for machinery renovation investments continued. Decreased investments until then have started to increase by encouraging the investments again since 1985 in developing places having priority. As a result, while there were 307 flour plants with wheat breaking capacity of 5.9 million ton/year in 1977, the number of the plants with a wheat breaking capacity of 13.8 million tons reached to 584 in 1986. The number of the plants was close to 700 in 1990s and annual wheat breaking capacity reached to 22 million tons.” Also in his speech, Akgün says that currently total flour production in Turkey is estimated to be 32.5 million tons and he adds: “active production is around 14.5 million tons. With this numbers available production capacity is nearly three times more than the total flour consumption in Turkey. In addition, available flour production capacity of Turkey can meet the flour trade in the world which is 11 million ton while its capacity is 7.5 million tons more.” “Capacity usage rate is 35 percent in Turkey” The President of Central Anatolia Flour Industrialists’ Association Rıfat Hekimoğlu also mentioned about inactive capacity problem in his speech in December 2014. Stating that capacity usage rate is 65 percent in the world although it is around 35 percent in Turkey, Hekimoğlu said: “when compared to USA and European countries, the number of operating companies in flour industry is quite high. Thus, a lot of factory had to operate with a low capacity. Total flour production capacity in Turkey is around 32,5 million tons and active production is around 14,5 million tons. Available production capacity is close to 3 times more than total flour consumption in Turkey.” SOLUTION TO CAPACITY AND SCALE PROBLEM Many people in this industry pointed out this subject in various times and still do. However these 3 statements are explanatory enough to cover the inactive capacity problem in Turkish flour industry in general terms. All of these show the uncontrolled growth in Turkish flour industry and inability of investors in scale and capacity planning. This also causes many problems like competence in the industry; decrease in productivity and profitability of businesses and unjust treatment of customers by decreasing the final product quality in a competition environment. Inactive capacity and concomitant problems may cause serious matters in the future especially for Turkish flour industry that put in an appearance in international markets. Thus, industry members advise different solutions to this problem. While there is not an extensive study in this subject yet, one of the most important solutions is available flour businesses unite, and official restrictions for future flour plants in terms of business scale, capacity, foundation place and etc. export is also considered as a solution to another problem. However, to increase export rates depends on quality production and so raw material. In addition, competence in international markets in terms of both quality and costs is important. Leaving raw material quality aside, one of the best ways to make production without decreasing quality in intense competition is to increase business scale. Making new investments with an intense inactive capacity will only create more inactive capacity. Thus, both solving the inactive capacity problem and enlarging business scale mean that consolidation is compulsory. “It is possible to increase global flour trade” The former president of Central Anatolia Flour Industrialists Association Rıfat Hekimoğlu says that Turkey needs to increase its export opportunities to use its inactive capacity. Hekimoğlu offer a solution in his explanation that he made 4 years ago: “Turkey’s share in 11-million-ton world flour trade is 1.8 million tons. Through effective marketing methods and government’s financial support to exports, it is possible to increase Turkey’s share in global flour trade. Quality raw material and developed technology usage also increase costs. Wheat types should be regulated according to the conditions of the country. We should meet quality wheat demands with our own wheat.” “Consolidation is essential to reduce inactive capacity” In an interview we made in 2013, the key solution that the president of E. Günhan Ulusoy, TUSAF (Turkish Flour Industrialists’ Association) offered is official restrictions to setting up new factories. Ulusoy stated as follows: “To be honest, no one can say ‘Close this business down” to a businessman operating one way or another. The reason for this is that this factory was set up without any obstacle or quota. This is also the basic reason for inactive capacity. Without determining a location or considering the distance of two plants to each other, official authorization is given. If we succeed to prevent this, inactive capacity problem which is our common problem also can be solved to some extent.” Ulusoy thinks that increasing export rates can be a solution too but it is not enough: “To increase exports may reduce our inactive capacity problem to some extent as well as its contributions to our economy. This is a positive situation both for us, flour industrialists and for the citizens living in this country. However, making export is not the only solution to inactive capacity problem because global flour trade in the world is around 13 million tons. If we happen to produce all of them by ourselves, we cannot reach our capacity even so. Consolidation is essential to reduce inactive capacity.” “Partnership with foreign investors is a must” Flour and Bakery products Industry Report prepared with the coordination of Akın Kınıklı, the President of Aegean Region Chamber of Industry (EBSO) pointed out the same problem. According to the research, lifting the incentives due to the policies produced to prevent uncontrolled growth of the industry increased the ongoing competence problem. In the report stating that incentives should continue, it is reminded businesses in flour industry are family owned businesses in general terms. The writers of the report estimates that such businesses fall into danger in crises and so they can unite in new economic order. That the industry should make partnerships with foreign investors is one of the ideas that are pointed in the report. It says in the report: “Investment potential of foreign countries should be determined and the future of the industry should be organized. New strategies should be set and target countries should be established. Companies should be supported through exhibitions. Turkish flour industry should be included in Fight Hunger Program of United Nations. Turkey should use its strategic and logistic advantages, its geographical position. Turkey should have a role as an aisle for grains in the region as it is in energy and natural gas.”
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