Jeff should give greater priority to a smaller facility with possibility of expansion or more into a larger facility immediately.
Jeff should give priority to the larger facility. The larger facility offers Jeff much more benefit over its initial cost, relative to the smaller facility. As eluded to within the case, the demand for Jeff’s business is growing exponentially. Research has shown that data is growing at nearly 30%-40% per year in many companies. According to computer world, in 2011 alone, 1.8 zettabytes (1.8 trillion gigabytes) of data will be created in America. This number is equivalent to every U.S. citizen writing 3 tweets per minute for 26,976 years. In addition, over the next decade, the number of servers managing the world’s data stores will grow by ten times (Mearian, 2013). Jeff therefore will need an operation to handle the coming wave of data so that he can adequately serve clients. A study conducted by the IDC indicates that by 2020, overall date will grow by 50 times. Furthermore, Since 2005 annual investments by enterprises in hardware, software and cloud services technologies, along with the staff to manage information, has increased 50% to $4 trillion. Even banks around the world are investing extensively for the impending demand of big data (Hargraves, 2013). Concepts such as big data prove that the need to put paper documents on CD’s is growing. Companies are becoming more reliant on technology as competitive forces create massive demand for miniaturization and seamless transfer of information. Companies are therefore willing to spend large amounts of money for the proper storage and handling of sensitive information. As information grows at the indicated level of the IDC report, Jeff must be ready to serve his large clients in an appropriate and timely fashion. As such, the large facility will facilitate the overall growth in data and the need to put it on CDs. Social data is also becoming important for companies as they utilize social networking to better ascertain consumer sentiments regarding a product. All of these trends bode well for Jeff and his business. Data is growing exponentially. Therefore, Jeff will need a bigger facility to house the coming trend in data usages worldwide.
In addition emerging markets will also take part in the pending globalization of business activities. Jeff’s business relies extensively on delivery of documents and other forms of paper documents. As such geographic boundaries are in many instances nonexistent. A company with global operations can easily send information to Jeff’s location in the same manner a domestic company can. The price to ship documents and the time lag will be much higher for the international business. However, innovation could help abate or diminish the influences of these negative impacts. Emailing encrypted data in a zip folder, documents that will be transferred to a CD, would be a viable option. As such, Jeff will need a bigger facility as international companies become interested in his services.
Finally, a bigger facility will help Jeff financially due to economies of scale. In general, many of Jeff’s expenses are fixed in nature. The facility, the equipment needed to transfer information to the CD’s, the scanners, and the computers are all fixed assets (Sullivan, 2003). As such, their price remains relatively constant over time. By producing more units over a large amount of fixed costs, the cost per unit decreases. For example, assuming that Jeff’s fixed costs are $100. The cost of using the fixed assets will remain $100 irrespective if Jeff produces 10 CDs or 1000 CDs. If Jeff only produces 10 CDs the unit cost per CD will be $10 ($100 in fixed assets divided by 10 CDs). However, if Jeff produces 1000 CDs, the unit cost per CD will be 10 cents. Using the information from above, Jeff can reasonably expect more demand for his services. Therefore, it is also reasonable to assume that Jeff will produce more CDs over his fixed cost structure. As such, large facility housing more fixed cost assets will reduce the cost per CD over the long-term as demand continues to increase. Over time, due to economies of scale, the unit cost per CD will be virtually nothing, which allows Jeff to have higher margins in his business overall (Moore, 1959). These economies of scale however, would be reduced if Jeff utilizes are smaller facility. Below is chart explaining this concept in regards to Jeff’s business.
Finally, Jeff must also consider competitive forces eroding his market share. Jeff operates within a capitalistic society. His business has very little barriers to entry. As such, anyone can essentially create Jeff’s operations. In particular, his business is based extensively on commodities. There is very little differentiation from Jeff’s CD, than that of a competitor. As such, Jeff will eventually have to compete based on price alone. This is not a good position for Jeff starting out. Those with more financial resources could potentially reduce margins and income so dramatically, that Jeff might be forced to discontinue operations. To better defend himself from an unforgiving wave of competition, Jeff must first establish his place in the market while also being mindful of costs. By lowering costs, Jeff may discourage those looking to compete with him. A larger facility, with the use of economies of scale would be the best mechanism for Jeff to do so. Otherwise competitors with more financial resources may engage in price wars that will ultimately put Jeff out of business.
Determine weights for the two (2) capacity factors based on your finding above and discuss how you concluded these were appropriate weights.
Using the information garnered above, I would give a weighting of 40 to the metric, “Facility with excess capacity.” As mentioned above, a facility with excess capacity would help maintain both competitive advantage and margins for Jeff. It would also allow the company to respond promptly to growing demand for his services as data begins to flourish. Through the use of economies of scale, Jeff can better defend his market position from lower cost producers. If he desires, he could even lower prices to create more value for his customers. This can not be done however, unless Jeff has the facility to accommodate a sizable increase in fixed costs while also lower the cost per unit of production. In addition, I would give the metric, ” facility with the potential for expansion,” a weighting of 20 points. Expansion will ultimately be important if Jeff wants to grow this business. However, to grow, Jeff must first become established within this current market. Jeff should then focus on the growing demand for his client now with a possibility of future expansion in the event that his business attracts more clients.
Once you have selected the factors for the two (2) capacity alternatives, use factor rating to select a new location for Data Tech.
I would select facility 1 for the new location for Data Tech. I believe facility 1 offers the best value proposition for Jeff as his business continues to grow. As mentioned earlier, the most important factor for the continued operations for Jeff’s facility is capacity. The data provided above, indicates that data and IT spend will be very important aspects for businesses moving forward. As Data Tech can capitalize on the growing interest in security, infrastructure, and backup systems, most of which Data Tech provides. In addition, facility 1 scores high on the proximity of both the business community and post office. Proximity to the business community is highly important as Data Tech can establish relationships with those in its immediate sphere of influence. This service could potentially create an attractive word of mouth campaign for the company. It also provides the company with the ability to provide faster, more reliable service than its more distant counterparts. In addition, the company will save of expenses such as vehicle maintenance, gas, and other costs associated with distance to pivotal distribution networks.
Determine how your factor analysis would be different if you had selected a different capacity alternative.
My factor analysis will not have changed if I had selected a different capacity alternative. Jeff’s business relies on fixed costs. Therefore, through the analysis mentioned above, capacity and cost are the major concerns for Jeff’s business going forward. The business overall is a commodity. Therefore, in order to prevent price wars with competition, Jeff must focus on both capacity and costs. Data Tech is in a unique position, as capacity directly correlates to overall unit cost. By selecting a different capacity alternative, the need for cost reductions would not change. In fact, cost concerns may be exacerbated. It is my contention, therefore, that selecting a different capacity alternative would not change the overall factor analysis.
References:
1) Hargraves, Heather. “IDC Financial Insights Report Finds Worldwide Bank IT Spending Continues to Grow.” IDC Financial Insights Report Finds Worldwide Bank IT Spending Continues to Grow – PrUS23599012. IDC, 16 July 2012. Web. 26 Feb. 2013.
2) Mearian, Lucas. “World’s Data Will Grow by 50X in next Decade, IDC Study Predicts.” Computerworld. N.p., 28 June 2011. Web. 26 Feb. 2013.
3) Moore, Fredrick T. (May 1959). “Economies of Scale: Some statistical Evidence.” Quarterly Journal of Economics (MIT Press) 73 (2): 232 — 245. http://msuweb.montclair.edu/~lebelp/MooreEcsScaleQJE1959.pdf
4) Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 157. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
