Strategic Modelling and Business Dynamics: A Feedback Systems Approach

7.6. Policy Structure and Formulations for Capital Investment

At the heart of capital investment lies the question of whether the firm should expand capacity and by how much. As discussed earlier, business leaders take quite different approaches to investment decisions. Some invest according to a vision of future demand while others need hard evidence that the factory is stretched or that the financial return will be high. In this case, we represent a conservative investment policy driven by operating pressures in the factory. The policy is conceived in three parts as shown by the grey areas in Figure 7.18. There is an assessment of delivery delay that drives capacity expansion. Lying behind this assessment is a process of goal formation in which factory managers establish the company's standards for delivery performance. The corresponding formulations are described below.

7.6.1. Assessment of Delivery Delay

From a factory perspective, a high delivery delay is a mixed blessing. On the one hand, it suggests that a product is selling well and is popular with customers. On the other hand, it is a sign that production capacity is inadequate. So a crucial question for factory managers is whether delivery delay is too high. This managerial judgement is captured in the concept 'delivery delay condition', which is defined as the ratio of delivery delay recognised by the factory to delivery delay operating goal. If the ratio takes a value of one then delivery delay is exactly on target ...