1 Chapter 9– Capacity Planning & Facility Location COURAGE IS BEING SCARED, BUT MOUNTING UP ANYWAY- John Wayne5 Problems recommended with this chapter3 - Capacity7 - Decision Tree12 or 13. Site Selection (factor rating method)15. Load-Distance Model16. Grid (gravity) site selection (builds on #15.Why are capacity & Location discussed in the same chapter?
2 Learning Objectives Define capacity planning and location analysis Describe relationship between capacity planning and location, and their importance to the organizationExplain the steps involved in capacity planning and location analysisDescribe the decision support tools used for capacity planningIdentify key factors in location analysisDescribe the decision support tools used for location analysis
3 Capacity planningCapacity is the maximum output rate of a production or service facilityCapacity planning is the process of establishing the output rate that may be needed at a facility:Capacity is usually purchased in “chunks”Strategic issues: how much and when to spend capital for additional facility & equipmentTactical issues: workforce & inventory levels, & day-to-day use of equipment
4 Measuring Capacity Examples There is no one best way to measure capacityOutput measures like kegs per day are easier to understandWith multiple products, inputs measures work betterWhat was productivity?Output measures of capacity have a lot of the same features as productivity.
5 Capacity Information Needed Design capacity:Maximum output rate under ideal conditionsA bakery can make 30 custom cakes per day when pushed at holiday timeEffective capacity:Maximum output rate under normal (realistic) conditionsOn the average this bakery can make 20 custom cakes per day- Need to know this……..
6 Calculating Capacity Utilization Measures how much of the available capacity is actually being used:Measures effectivenessUse either effective or design capacity in denominator
7 Example of Computing Capacity Utilization: In the bakery example the 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 capacityThe bakery can only operate at this level for a short period of time
8 How Much Capacity Is Best? The Best Operating Level is the output than results in the lowest average unit costEconomies of Scale:Where the cost per unit of output drops as volume of output increasesSpread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of materialDiseconomies of Scale:Where the cost per unit rises as volume increasesOften caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity
9 Best Operating Level and Size Alternative 1: Purchase one large facility, requiring one largeinitial investmentAlternative 2: Add capacity incrementally in smaller chunks asneeded
10 Other Capacity Considerations Focused factories:Small, specialized facilities with limited objectivesPlant within a plant (PWP):Segmenting larger operations into smaller operating units with focused objectivesSubcontractor networks:Outsource non-core items to free up capacity for what you do wellFacilities can respond more efficiently if they are small, specialized operations focused on narrow set of objectives (Focused Factories)This slightly conflicts with the economies of scale rationale – current trend is more flexible.Concept can be expanded to large facilities to produce PWP.
11 Making Capacity Planning Decisions The three-step procedure for making capacity planning decisions is as follows:Step 1: Identify Capacity RequirementsStep 2: Develop Capacity AlternativesStep 3: Evaluate Capacity Alternatives
12 Identifying capacity requirements Long-term capacity requirements based on future demandIdentifying future demand based on forecastingForecasting, at this level, relies on qualitative forecast modelsExecutive opinionDelphi methodForecast and capacity decision must included strategic implicationsCapacity cushionsPlan to underutilize capacity to provide flexibility
13 Evaluating Capacity Alternatives Capacity alternatives includeCould do nothing,expand large now (may included capacity cushion), orexpand small now with option to add later
14 Evaluating Capacity Alternatives Many tools exist to assist in evaluating alternativesMost popular tool is Decision TreesDecision Trees analysis tool is:a modeling tool for evaluating sequential decisions which,identifies the alternatives at each point in time (decision points), estimate probable consequences of each decision (chance events) & the ultimate outcomes (e.g.: profit or loss)
15 Decision tree diagrams Diagramming technique which usesDecision points – points in time when decisions are made, squares called nodesDecision alternatives – branches of the tree off the decision nodesChance events – events that could affect a decision, branches or arrows leaving circular chance nodesOutcomes – each possible alternative listed
16 Decision tree diagrams Decision trees developed byDrawing from left to rightUse squares to indicate decision pointsUse circles to indicate chance eventsWrite the probability of each chance by the chance (sum of associated chances = 100%)Write each alternative outcome in the right margin
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?The likelihood of demand being high is .70The likelihood of demand being low is .30Large expansion yields profits of $300K(high dem.) or $50k(low dem.)Small expansion yields profits of $80K if demand is lowSmall 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(.70)(200,000) + (.30)(80,000) = $164,000(.70)(300,000) + (.30)(80,000) = $225,000Pursue large expansion.
18 Evaluating the Decision Tree Decision tree analysis utilizes expected value analysis (EVA)EVA is a weighted average of the chance eventsProbability of occurrence * chance event outcomeRefer to Figure 9-3At 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
19 Evaluating the Decision Tree - continued Calculate expected value of large expansion:EVlarge = 0.30($50,000) ($300,000) = $225,000At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit:$225,000 > $164,000Choose large expansion despite the fact that there is a 30% chance it’s the worst decision:Take the calculated risk!
20 Facility Location Three most important factors in real estate: Facility location is the process of identifying the best geographic location for a service or production facilityImportant because they are: long term commitments & they are expensive.Rarely is there only one “best” location - some locations satisfy some factors - another may be better for other factors.What kinds of factors are we looking at?(next slide)
21 Location Factors Proximity to suppliers: Proximity to customers: Reduce transportation costs of perishable or bulky raw materialsProximity to customers:E.g.: high population areas, close to JIT partnersProximity to labor:Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)
22 More Location Factors Community considerations: Site considerations: Local community’s attitude toward the facility (e.g.: 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.
23 Should Firm Go Global?Globalization is the process of locating facilities around the worldPotential advantages:Inside track to foreign markets, avoid trade barriers, gain access to cheaper laborPotential disadvantages:Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflationOther issues:Language barriers, different laws & regulations, different business cultures
25 Factor Rating Example 1. ID dominant factors. 2. Assign weights to each factor representing relative importance (must = 100)3. Select a rating scale (ie: )4. Evaluate each alternative for each factor5. Multiply rating (location scores) times factor weight6. Add the results for total score for the location
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 citiesRectilinear Distance = sum of the line segments identifying the location( ) + ( ) = = 45 milesMultiply time number of trips.Center of Gravity (put on the Board)Sum all Products of Multiplying X coordinates times loads then divide by # of loads (X= 7.9)Do the same for Y coordinates. (Y = 10.6)Break-even analysiscalculate total cost & total revenue (where they are equal is the Break even Quantity).Transportation Model - linear programming - won’t do it.
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.
28 The Center of Gravity Approach This approach requires that the analyst find the center of gravity of the geographic area being consideredComputing the Center of Gravity for Matrix ManufacturingIs there another possible warehouse location closer to the C.G. that should be considered?? Why?1004812
29 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 citiesRectilinear Distance = sum of the line segments identifying the location( ) + ( ) = = 45 milesMultiply time number of trips.Center of Gravity (put on the Board)Sum all Products of Multiplying X coordinates times loads then divide by # of loads (X= 7.9)Do the same for Y coordinates. (Y = 10.6)Break-even analysiscalculate total cost & total revenue (where they are equal is the Break even Quantity).Transportation Model - linear programming - won’t do it.
30 Break-Even AnalysisBreak-even analysis can be used for location analysis especially when the costs of each location are knownStep 1: For each location, determine the fixed andvariable costsStep 2: Plot the total costs for each location on one graphStep 3: Identify ranges of output for which each locationhas the lowest total costStep 4: Solve algebraically for the break-even pointsover the identified rangesRemember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q.Total cost = F + cQTotal revenue = pQBreak-even is where Total Revenue = Total Cost
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
32 The Transportation Method The transportation method of linear programming can be used to solve specific location problemsIt is discussed in detail in the supplement to this textIt could be used to evaluate the cost impact of adding potential location sites to the network of existing facilitiesIt could also be used to evaluate adding multiple new sites or completely redesigning the networkSkip This Slide
33 Capacity Planning and Facility Location Across the Organization Capacity planning and location analysis affect operations management and are important to many othersFinance provides input to finalize capacity decisionsMarketing impacted by the organizational capacity and location to customers
34 Chapter 9 HighlightsCapacity 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 decisions are often made at the same time because they are inter-related.The analysis steps for both capacity and location analysis are assessing needs, developing alternatives, and evaluating alternatives.1. Capacity Planning - the process of establishing the output rate that can be achieved by a facility. Deciding the maximum output rate of a facility.2. Location Analysis - determining the best location for a facility3. Size of a facility, hence capacity, of facility is tied to its location.4. Capacity --- decision treeLocation --- Factor Rating - Load-Distance Model - Center of Gravity - Break-even Analysis - Transportation Model
35 Chapter 9 Highlights (continued) To choose between capacity planning alternatives managers may use a modeling tool like decision treesKey factors in location analysis include proximity to customers, transportation, source of labor, community attitude, and proximity to supplies.Location analysis tools include factor ratings, the load-distance model, the center of gravity approach, break-even analysis, and the transportation method.3 steps: assess need - identify alternatives -- evaluate alternativesLocation is usually related to capacityIf an expand decision is made it surfaces the issue of where to locateLong-term High cost impactAffects ability to support customer service.
36 Chapter 9 Highlights - continued 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.