Demonstration case 04 - investment decision
Synthetic capacity-growth scenarioSecond shift, outsourcing or new equipment?
When current capacity is no longer enough, the question is not only how to increase production. The question is which option makes sense when we do not yet know how durable demand growth will be.
Synthetic demonstration based on a realistic business problem. It does not represent a project for a specific client.
Compare optionsHow does the decision look without a model?
One intuition easily becomes a universal answer.
When demand rises, the discussion often starts with a new machine, or with the opposite claim that equipment is too expensive and outsourcing is safer. The problem is that the same option does not have the same economics at every growth level and duration.
Overtime - fast and limited
Second shift - fixed cost and medium extra capacity
Outsourcing - flexible, but variable cost rises with volume
New equipment - high initial CAPEX and larger long-term capacity
What does the model consider?
Alternatives are checked for feasibility first, then compared on cost and other criteria.
The synthetic model compares three levels of additional monthly demand over 36 months. The financial layer is intentionally simplified, while capacity, implementation speed, flexibility and operating risk are considered separately.
Alternatives
Overtime, second shift, outsourcing and new equipment.
Scenarios
+500, +2,000 and +4,500 units per month.
Cost
Direct incremental cost over 36 months.
Non-financial criteria
Capacity, speed, flexibility and operating risk.
View assumptions and option costs
The current monthly capacity is 11,000 units. The simplified 36-month financial model deliberately excludes taxes, financing, residual value, inflation and installation downtime. Implementation lead time is shown separately and would require bridging logic in a real project.
| Alternative | Added capacity | Cost assumption | Implementation |
|---|---|---|---|
| Overtime | +1,000 / month | EUR 5 / incremental unit | Immediate |
| Second shift | +3,000 / month | EUR 90,000 / year | about 2 months |
| Outsourcing | up to +5,000 / month | EUR 8 / outsourced unit | about 2 weeks |
| New equipment | +5,000 / month | EUR 220,000 CAPEX + EUR 30,000 / year | about 6 months |
Scenario comparison
The same decision does not have the same answer in every scenario.
At low growth, overtime has the lowest direct incremental cost. At medium growth, a second shift is the cheapest feasible option. At high and persistent growth, the simplified cost model favors new equipment over continuous outsourcing.
+500 / month
Low growth
OvertimeEUR 90,000
Second shiftEUR 270,000
OutsourcingEUR 144,000
New equipmentEUR 310,000
Lowest direct cost: overtime
+2,000 / month
Medium growth
OvertimeNot feasible
Second shiftEUR 270,000
OutsourcingEUR 576,000
New equipmentEUR 310,000
Lowest feasible direct cost: second shift
+4,500 / month
High growth
OvertimeNot feasible
Second shiftNot feasible
OutsourcingEUR 1,296,000
New equipmentEUR 310,000
Simplified 36-month direct-cost result: new equipment
The cost comparison excludes taxes, financing, residual value, inflation, installation downtime and the transition period until capacity becomes fully available. In a real project these factors may change the decision.
The decision can become attached to one preferred alternative before scenarios are tested.
The model checks capacity first, then thresholds and sensitivity.
Management sees what must be true for a specific alternative to make sense.
Break-even / sensitivity
Break-even is not the same as a recommendation.
Full outsourcing over 36 months costs EUR 8 per incremental monthly unit multiplied by 36 months. New equipment over the same simplified period costs EUR 220,000 CAPEX plus EUR 90,000 OPEX, or EUR 310,000 in total.
about 1,076 additional units per monthsimple outsourcing vs equipment crossover
Above that level of stable additional demand, the simple 36-month cost model starts to favor new equipment over full outsourcing. That is still not an investment recommendation because CAPEX, implementation time, reversibility and demand risk remain important.
Multi-criteria layer
Cost is not the only criterion.
Relative importance belongs to the decision-maker. If demand is uncertain, flexibility and speed may receive greater weight. If additional demand is contractually secure, capacity and direct cost may become more important.
XAIOR - explaining the result
Why does the preferred option change by scenario?
The economics of the alternatives do not scale in the same way with volume and time.
Outsourcing has low initial risk and high flexibility, but its cost grows almost linearly with incremental volume.
New equipment requires high initial capital and longer implementation, but its 36-month direct cost in this simplified example does not increase with extra volume while demand remains within its added capacity.
A second shift has a fixed annual cost and an added-capacity limit of 3,000 units per month, so it is not feasible in the high-growth scenario.
The key question is therefore not only how much the machine costs, but how much additional demand is expected, how long it will last and how confident management is in that assumption.
From demonstration to a real problem
What if these were your data?
A real model may include sales forecasts, capacity, labor cost, outsourcing price, CAPEX, OPEX, procurement lead time, financing, maintenance, scenario probabilities and business criteria.
When is a second shift no longer enough?
When does outsourcing become more expensive than investment?
How long must growth last for CAPEX to make sense?
How much does the decision change if the demand forecast shifts by 10%?