"Creating a Volume-Flexible Firm"

Amitabh Raturi and Eric Jack

Business Horizons

November-December 2004, pp. 69-78

The authors define volume flexibility as "the ability of a firm to respond to a wide variation in demand quickly and effectively... It enables a firm to effectively increase or decrease aggregate production levels in response to customer demand, and to maintain a high level of delivery reliability by preventing out-of-stock conditions for products that are suddenly in high demand. Conversely, in periods of slow demand, a volume-flexible firm is not saddled with excess inventory and/or surplus capacity."

A three-step method is proposed for developing an effective volume strategy:

1. Assess the current need—The key questions to be answered here are "What are the key market forces that require my firm to develop volume-flexible responses?" and "What prevents my firm from moving toward a volume-flexible response?" External market-driven forces include high variability in demand, many market segments, short time buffers for delivery, and high product customization. Internal capabilities that affect the need for volume flexibility include demand forecasting challenges, delivery reliability as a key strategy, and narrow focus of the firm (which puts the firm at risk if there are marked variations in demand).
2. Assess Current Capabilities—The key questions to be answered here are "How well does my firm accommodate sales variation, order size variation, and last-minute order changes?"; "How much sales variation do I have from one quarter to the next, and how does this compare to variation in costs and inventory levels?"; and "How does my firm rank on quantitative, process-based volume flexibility measures, as compared to key competitors and other firms in the industry?" Some of the potential assessment factors of current volume flexibility in the firm include: availability of current high-volume production equipment; inventory and capacity buffers; workforce availability in the local labor market; workforce skill levels; training costs; effective planning and control systems; ability for rapid workforce and shift expansions; network of plants; extensive network of vendors and suppliers; and well-established and disciplined distribution networks.
3. Identify the Appropriate Volume Flexibility Response—Four possible approaches are identified: (a) shielding from uncertainty, which "prescribes identifying the sources that exaggerate demand uncertainty and removing them form the value-adding chain that provides goods and services to the customer"; (b) absorbing uncertainty, which involves using buffers of inventory, time, and capacity; (c) containing uncertainty, where the company deploys volume-flexible technology and innovative scheduling; and (d) mitigating uncertainty, which includes risk pooling and leveling production.

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