1. Chapter 9– Capacity Planning & Facility Location
Operations Management by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
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2. Learning Objectives Define capacity planning Define location analysis
Describe relationship between capacity planning and location, and their importance
Explain the steps involved in capacity planning and location analysis
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3. Learning Objectives – con’t
Describe the decision support tools used for capacity planning
Identify key factors in location analysis
Describe the decision support tools used for location analysis
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4. Capacity planning Capacity is the maximum output rate of a facility
Capacity planning is the process of establishing the output rate that can be achieved at a facility:
Capacity is usually purchased in “chunks”
Strategic issues: how much and when to spend capital for additional facility & equipment
Tactical issues: workforce & inventory levels, & day-to-day use of equipment
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5. Measuring Capacity Examples
There is no one best way to measure capacity
Output measures like kegs per day are easier to understand
With multiple products, inputs measures work better
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6. Measuring Available Capacity
Design capacity:
Maximum output rate under ideal conditions
A bakery can make 30 custom cakes per day when pushed at holiday time
Effective capacity:
Maximum output rate under normal (realistic) conditions
On the average this bakery can make 20 custom cakes per day
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7. Measuring Effectiveness of Capacity Use
Measures how much of the available capacity is actually being used:
Measures effectiveness
Use either effective or design capacity in denominator
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8. The bakery can only operate at this level for a short period of time
Example of Computing Capacity Utilization: A bakery’s design capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes per day. What is the bakery’s capacity utilization relative to both design and effective capacity?
The current utilization is only slightly below its design capacity and considerably above its effective capacity
The bakery can only operate at this level for a short period of time
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9. Capacity Considerations
The Best Operating Level is the output that results in the lowest average unit cost
Economies of Scale:
Where the cost per unit of output drops as volume of output increases
Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material
Diseconomies of Scale:
Where the cost per unit rises as volume increases
Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity
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10. Best Operating Level and Size
Alternative 1: Purchase one large facility, requiring one large
initial investment
Alternative 2: Add capacity incrementally in smaller chunks as
needed
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11. Other Capacity Considerations
Focused factories:
Small, specialized facilities with limited objectives
Plant within a plant (PWP):
Segmenting larger operations into smaller operating units with focused objectives
Subcontractor networks:
Outsource non-core items to free up capacity for what you do well
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12. Making Capacity Planning Decisions
The three-step procedure for making capacity planning decisions is as follows:
Identify Capacity Requirements
Develop Capacity Alternatives
Evaluate Capacity Alternatives
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13. Identifying capacity requirements
Forecasting Capacity:
Long-term capacity requirements based on future demand
Identifying future demand based on forecasting
Forecasting, at this level, relies on qualitative forecast models
Executive opinion
Delphi method
Forecast and capacity decision must included strategic implications
Capacity cushions
Plan to underutilize capacity to provide flexibility
Strategic Implications
How much capacity a competitor might have
Potential for overcapacity in industry a possible hazard
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14. Developing & Evaluating Capacity Alternatives
Capacity alternatives include
Could do nothing,
expand large now (may included capacity cushion), or
expand small now with option to add later
Use decision support aids to evaluate decisions (decision tree most popular)
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15. Decision trees Diagramming technique which uses
Decision points – points in time when decisions are made, squares called nodes
Decision alternatives – branches of the tree off the decision nodes
Chance events – events that could affect a decision, branches or arrows leaving circular chance nodes
Outcomes – each possible alternative listed
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16. Decision tree diagrams
Decision trees developed by
Drawing from left to right
Use squares to indicate decision points
Use circles to indicate chance events
Write the probability of each chance by the chance (sum of associated chances = 100%)
Write each alternative outcome in the right margin
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17. Example Using Decision Trees: A restaurant owner has determined that she needs to expand her facility. The alternatives are to expand large now and risk smaller demand, or expand on a smaller scale now knowing that she might need to expand again in three years. Which alternative would be most attractive? (see notes)
The likelihood of demand being high is .70
The likelihood of demand being low is .30
Large expansion yields profits of $300K(high dem.) or $50k(low dem.)
Small expansion yields profits of $80K if demand is low
Small expansion followed by high demand and later expansion yield a profit of $200K at that point. No expansion at that point yields profit of $150K
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18. Evaluating the Decision Tree
Decision tree analysis utilizes expected value analysis (EVA)
EVA is a weighted average of the chance events
Probability of occurrence * chance event outcome
Refer to previous slide
At decision point 2, choose to expand to maximize profits ($200,000 > $150,000)
Calculate expected value of small expansion:
EVsmall = 0.30($80,000) ($200,000) = $164,000
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19. Evaluating the Decision Tree con’t
Calculate expected value of large expansion:
EVlarge = 0.30($50,000) ($300,000) = $225,000
At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit:
$225,000 > $164,000
Choose large expansion despite the fact that there is a 30% chance it’s the worst decision:
Take the calculated risk!
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20. Location Analysis Three most important factors in real estate:
Facility location is the process of identifying the best geographic location for a service or production facility
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21. Factors Affecting Location Decisions
Proximity to source of supply:
Reduce transportation costs of perishable or bulky raw materials
Proximity to customers:
High population areas, close to JIT partners
Proximity to labor:
Local wage rates, attitude toward unions, availability of special skills (silicon valley)
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22. More Location Factors Community considerations: Site considerations:
Local community’s attitude toward the facility (prisons, utility plants, etc.)
Site considerations:
Local zoning & taxes, access to utilities, etc.
Quality-of-life issues:
Climate, cultural attractions, commuting time, etc.
Other considerations:
Options for future expansion, local competition, etc.
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23. Globalization – Should Firm Go Global?
Globalization is the process of locating facilities around the world
Potential advantages:
Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor
Potential disadvantages:
Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation
Other issues to consider:
Language barriers, different laws & regulations, different business cultures
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24. Making Location Decisions
Analysis should follow 3 step process:
Identify dominant location factors
Develop location alternatives
Evaluate locations alternatives
Procedures for evaluation location alternatives include
Factor rating method
Load-distance model
Center of gravity approach
Break-even analysis
Transportation method
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25. Factor Rating Example
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26. Calculate the rectilinear distance:
A Load-Distance Model Example: Matrix Manufacturing is considering where to locate its warehouse in order to service its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision.
Calculate the rectilinear distance:
Multiply by the number of loads between each site and the four cities
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27. Calculating the Load-Distance Score for Springfield vs. Mansfield
The load-distance score for Mansfield is higher than for Springfield. The warehouse should be located in Springfield.
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28. The Center of Gravity Approach
This approach requires that the analyst find the center of gravity of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Is there another possible warehouse location closer to the C.G. that should be considered?? Why?
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29. Break-Even Analysis
Break-even analysis computes the amount of goods required to be sold to just cover costs
Break-even analysis includes fixed and variable costs
Break-even analysis can be used for location analysis especially when the costs of each location are known
Step 1: For each location, determine the fixed and
variable costs
Step 2: Plot the total costs for each location on one graph
Step 3: Identify ranges of output for which each location
has the lowest total cost
Step 4: Solve algebraically for the break-even points
over the identified ranges
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30. Break-Even Analysis
Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q.
Total cost = F + cQ
Total revenue = pQ
Break-even is where Total Revenue = Total Cost
Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
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31. Example using Break-even Analysis: Clean-Clothes Cleaners is considering four possible sites for its new operation. They expect to clean 10,000 garments. The table and graph below are used for the analysis.
From the graph you can see that the two lowest cost intersections occur between C & B (4667 units) and B & A (9000 units)
The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and above 9000 units the best site is A
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32. The Transportation Method
Can be used to solve specific location problems
Is discussed in detail in the supplement to this text
Could be used to evaluate the cost impact of adding potential location sites to the network of existing facilities
Could also be used to evaluate adding multiple new sites or completely redesigning the network
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33. Capacity Planning & Facility Location within OM
Decisions about capacity and location are highly dependent on forecasts of demand (Ch 8).
Capacity is also affected by operations strategy (Ch 2), as size of capacity is a key element of organizational structure.
Other operations decisions that are affected by capacity and location are issues of job design and labor skills (Ch 11), choice on the mix of labor and technology, as well as choices on technology and automation (Ch 3).
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34. Capacity Planning and Facility Location Across the Organization
Capacity planning and location analysis affect operations management and are important to many others
Finance provides input to finalize capacity decisions
Marketing impacted by the organizational capacity and location to customers
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35. Chapter 9 Highlights
Capacity planning is deciding on the maximum output rate of a facility
Location analysis is deciding on the best location for a facility
Capacity planning and location analysis decision are often made simultaneously because the location of the facility is usually related to its capacity.
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36. Chapter 9 Highlights – con’t
In both capacity planning and location analysis, managers must follow three-step process to make good decision. The steps are assessing needs, developing alternatives, and evaluating alternatives.
To choose between capacity planning alternatives managers may use decision trees, which are a modeling tool for evaluating independent decisions that must be made in sequence.
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37. Chapter 9 Highlights – con’t
Key factors in location analysis included proximity to customers, transportation, source of labor, community attitude, and proximity to supplies. Service and manufacturing firms focus on different factors. Profit-making and nonprofit organizations also focus on different factors.
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38. Chapter 9 Highlights – con’t
Several tools can be used to facilitate location analysis. Factor rating is a tool that helps managers evaluate qualitative factors. The load-distance model and center of gravity approach evaluate the location decision based on distance. Break-even analysis is used to evaluate location decisions based on cost values. The transportation method is an excellent tool for evaluating the cost impact of adding sites to the network of current facilities.
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39. Chapter 9 Homework Hints
Problem 9.5: calculate utilizations based on design and effective capacities (see example 9.1). Present conclusions.
Problem 9.14: use factor rating method to compare the possible locations (see example 9.3).
Problem 9.15: use load-distance model to compare locations (see example 9.4).
Problem 9.16: use center-of-gravity method. Use data from problem 15 (e.g. load between city and warehouse) to determine desired coordinates for the new warehouse.