Capitaallinearity

A philosophy for designing and procuring machinery in which small amounts of capacity can be added or taken away as changes in demand occur. Thus, the capital required per part produced can be kept nearly constant (linear). 

In purchasing capacity for an annual output of 100,000 units, a producer may purchase a set of machines, each with an annual capacity of 100,000 units, and place them together in one continuous flow production line (first alternative). But the producer can also purchase ten sets of smaller machines that it installs in ten cells, with each cell having an annual capacity of 10,000 units (second alternative). 

If the forecast of 100,000 units proved exactly correct, one line with a capacity of 100,000 units would be the most capital-efficient solution. But if actual demand differs, the second alternative offers clear advantages: 

• When demand exceeds 100,000 units, the producer could either add a second line with a capacity of 100,000 units or exactly the number of cells needed, each with a capacity of 10,000 units, to meet the greater demand. By adding cells, the capital investment per unit of output would vary very little as demand changes; it would be almost linear.
  
• When actual demand is less than 100,000 units, a bigger problem arises. In the case of the first alternative, it is almost impossible to reduce capacity and maintain efficiency at current levels. The second alternative, however, allows the producer to remove capacity by closing as many cells as needed.