Pineapple Corporation: Strategic Capacity Planning Amidst Growing Demand
David Ash, Vice-President and General Manager of Pineapple Corporation, had
recently returned from a suppliers’ conference in Illinois. Awaiting his attention on his desk
was a detailed report from Pineapple’s Chief Marketing Director, Shinchan Nohara,
outlining forecasted product demand. The report projected that, within five years, the
company’s current production capacity of 10,000 cartons per day would be insufficient to
meet growing demand. Additionally, the report included a proposed capacity expansion plan
designed to address this impending challenge effectively.
Pineapple Corporation, a midsized manufacturer and distributor of paper products,
operated four production facilities strategically located across North America. Products
from these facilities were shipped to seven distribution centres, with some production
facilities and distribution centres sharing the same site. Concerned about the implications of
the report, Ash convened a meeting with Pineapple’s planning committee. He began by
emphasizing the alarming forecast, which predicted that the company would be operating at
full capacity within four years. At this point, Jason Turtle, Pineapple’s Chief Engineer,
interjected, pointing out that the system’s effective capacity would be reached even sooner,
in three to four years. He explained that operating above 90% capacity on an ongoing basis
was unsustainable due to the necessary downtime for facility maintenance and repairs.
Nohara followed by clarifying that the demand forecast represented an aggregate
figure and that growth patterns varied significantly among the company’s seven distribution
centres. He highlighted that demand in Mexico, in particular, was expanding at a
substantially higher rate and that this demand was currently being fulfilled primarily by the
Los Angeles distribution facility. Ash proposed one potential solution to the growing
demand issue: constructing a new production plant adjacent to Pineapple’s existing
distribution centre in Ensenada, Mexico. He noted that during his visits to the Ensenada
centre, he had observed several favourable attributes of the area, including a modern road
network and a well-trained labour force. In contrast, Nohara suggested another option of
increasing the capacity of the existing production facilities. Turtle added that many of these
facilities were outdated and inefficient, with significant disparities in production costs due
to variations in labour, materials, and operational efficiency. The average production cost
per carton and the capacity of each facility were presented in Exhibit 2.
Turtle also pointed out that the average daily demand and distribution costs varied
across distribution centres. He shared cost data, as shown in Exhibit 3, explaining that
distribution costs included delivery and handling expenses, which were influenced by both
the distance from the production facility to the market area and the internal distribution
distances within the market area. His analysis also incorporated estimated distribution costs
for the proposed Ensenada plant. Nohara elaborated on the company’s standard capacity
planning approach, which involved six steps: estimating future demand requirements,
identifying capacity gaps, developing alternatives, evaluating and selecting the optimal
strategy, determining the capacity cushion, and specifying the timing.
Ash inquired about the size of the facility required to meet the company’s needs over
the next decade. Nohara responded that a facility with a daily capacity of 4,000 cartons,
requiring an initial investment of $30 million, should suffice. Turtle added that production
costs at the new plant would be approximately $10 per carton and estimated a construction
timeline of two years. Ash emphasized that the success of the project depended on precise
sizing and timing—two critical factors in capacity planning. He noted that the proposed
plant, with a 4,000-carton capacity, would provide a 1,000-carton cushion based on
projected demand over the next ten years. As the meeting drew to a close, Ash tasked Nohara
with preparing a detailed analysis of the capacity planning project by the end of the week.
Nohara confirmed that he would adhere to the firm’s standard planning parameters, which
included a 40% tax rate, straight-line depreciation, a 10-year useful life with no salvage
value, a 10% discount rate, a two-year construction cycle, and a 300-day operating schedule
per year. Ash signalled his approval, bringing the meeting to an end.
Exhibit 1: FORECASTED DEMAND OVER THE NEXT 10 YEARS
14000
Units/Day
12000
10000
Exhibit 2: PRODUCTION COSTS AND CAPACITIES
Facility
Production
Cost per Carton
Daily Capacity per
Carton
Toronto
$14
2,500
Denver
$19
1,500
Los Angeles
$13
3,500
Seattle
$17
2,500
Exhibit 3: PRODUCT DISTRIBUTION COSTS AND 5- AND 10YEAR DEMAND (DAILY CARTONS)
Production Facilities
Forecast
Centers
Toronto
Denver
L.A.
Seattle
Ensenada
5-Yr.
10-Yr.
Toronto
0.75
2.50
4.50
4.75
5.25
1000
1000
Denver
2.50
1.00
2.50
2.75
3.25
750
1000
L.A.
4.50
2.50
0.50
2.25
1.75
2500
3000
Seattle
4.75
2.75
2.25
0.75
2.50
1500
2000
Chicago
1.50
1.50
3.75
2.50
3.75
1500
2000
Atlanta
3.00
2.25
3.00
3.50
3.50
750
1000
Ensenada
5.25
3.25
1.75
3.75
0.50
2000
3000