What Is a Ramp-Up?
A ramp-up is a significant increase in the level of output of a company's products or services. A ramp-up typically occurs in anticipation of an imminent increase in demand. While it is generally a feature of smaller companies at an early stage of development, a ramp-up can also be undertaken by large companies that are rolling out new products or expanding in new geographies.
Key Takeaways
- The term ramp-up refers to when a company substantially increases its output in response to increased demand or an expected increase in the near term.
- Start-up companies also ramp up once they leave the prototype stage and begin regular production for the market.
- Larger companies may also ramp up production, when they introduce new products or enter a new market.
- Ramping up is costly and requires large capital investments in equipment and capacity. If demand does not last or is lower than expected, a firm may be left with excess capacity.
- Companies may sometimes ramp down, but they will rarely announce that they are ramping down.
How Ramping Up Works
Sometimes a company needs to increase its capacity utilization to meet a surge in demand or expected demand in the near term. A ramp-up typically entails substantial outlays of capital expenditures, which are large amounts of spending by a company on physical assets, such as property, buildings, and manufacturing equipment. A ramp-up in spending can also involve funds being used for technology upgrades as well as investments in hiring staff for an expected increase in sales or production.
As a result, a company will usually only consider a ramp-up once it has a reasonable degree of certainty about additional demand. Otherwise, if the anticipated demand does not materialize or is below projected levels, the company will be saddled with excess inventory and surplus capacity.
Understanding Ramping Up
The term ramp-up can also be applied to a larger-than-normal increase in expenses. Alluding to the foregoing, if a company states that it will ramp up production of goods, it could also say that it will ramp up the purchase of automation equipment to support the planned capacity expansion.
When a "ramp-up" comes up in press releases or on conference calls, it typically signals management confidence in the future of the business; however, the prudent investor should be on the watch for too much exuberance.
Ramping Up vs. Ramping Down
A ramp down refers to a decrease in production, usually due to a predicted fall in demand or business activity. Ramp-downs are common in seasonal industries, where workforce reductions are part of the normal business cycle. In order to process final paychecks and benefits, employers will typically retain a small core of administrative personnel as the company ramps down.
Ramping down may also be an expected consequence of a company that is offshoring or downsizing its production. Even after the company begins terminating its workforce, it will continue trying to extract as much value as possible from the remaining machinery and industrial capital, keeping a small part of the workforce in action.
Examples of Ramp-Ups
The term ramp-up tends to roll off the lips of confident executives who expect favorable economic conditions overall leading to brisk demand for their products. Rarely will a company publicly state that it is ramping down.
In a 2021 press release, General Motors outlined plans to increase deliveries to match increased consumer demand in Canada and the United States. According to the release:
GM will return full-size pickup production to Oshawa Assembly in Canada during the fourth quarter of 2021. The new accelerated timeline and incremental volume are expected to make an impact in 2022, as production ramps up.
Another example occurred during an earnings conference call of Saputo Inc., a Canadian manufacturer of milk, dairy products, and dairy alternatives. In the company's third-quarter earnings call of 2021, CEO Lino Anthony Saputo said he was:
Very excited about some of the strategic pillars our teams will be tackling to drive our U.S. business moving forward. These include increasing the value of our ingredients business, ramping up our core portfolio, optimizing our integrated business processes, leveraging ERP to increase efficiencies, optimizing our network and ramping up our dairy alternatives business.
In other words, the CEO appeared to be anticipating increased demand from U.S. consumers, sufficient to justify increasing production and exports to the American market.
Ramp-Up FAQs
What Are Synonyms for Ramp-Up?
The term "ramp-up" is similar to terms like "scale up" or "step up." Each expression signifies moving to a higher tier of production volume and efficiency.
Are Ramp-Ups Mostly Used by Small Companies?
"Ramp up" is a common corporate term in companies seeking to achieve productive growth. It is most commonly used in start-up stage companies that are only beginning to market their products.
As new entrants to the market, these small companies are most likely to be ramping up. However, even large companies may find it necessary to ramp up as they expand to new product lines or new markets.
What Factors Make a Ramp-Up Successful?
Ramping up production requires careful planning and market study. In manufacturing, it is necessary to study the process and machinery in order to optimize production for higher scale. The most crucial element of a ramp-up is ensuring sufficient market demand for the product.
What Is a Ramp-Up in Venture Capital?
In venture capital financing, ramping up refers to an increase in output prior to the exit of a financial backer. In this context, the venture capitalist waits for an increase in productivity or sales to raise the value of the company before selling their shares.
The Bottom Line
A ramp-up is one of several corporate terms used to describe an increase in production or sales by a company seeking to capture a greater market share. Most production costs tend to decrease at high volume thanks to economies of scale. As a result, a well-executed ramp-up allows most companies to reduce their per-unit expenses and increase their profit margins.
