1. Capacity Planning and Facility Location Chapter 9

2. Management 326 Operations and Operations Strategy Designing an Operations System Managing an Operations System Improving an Operations System

3. Designing an Operations System Project Management: A Design Tool Product Design Process Design Statistical Process Control Total Quality Management Capacity Planning & Facility Location Facility Layout

4. Capacity Planning Capacity is the maximum output rate of a production or service facility Capacity planning is the process of establishing the output rate that is likely to be needed at a facility. Capacity is usually purchased in “chunks” Long-term issues: how much and when to spend capital for additional facility & equipment Short-term issues: workforce & inventory levels, & day- to-day use of equipment

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, input measures work better See Table 9-1, page 306.

6. Capacity Information Needed 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

7. Capacity Utilization Measures how much of the available capacity is actually being used: Measures effectiveness Use either effective or design capacity in denominator

8. Example 9.1, page 307: 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 capacity The bakery can only operate at this level for a short period of time

9. Importance of Location Decisions Long-term decisions Difficult to reverse Affect fixed & variable costs Transportation cost for goods As much as 25% of product price Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of location to firm

10. Facility Location Decisions in Manufacturing and Services In manufacturing, location decisions are based primarily on costs. In services, location decisions are based primarily on revenue and profitability.

11. Service Location Factors Revenue: area from which the firm would draw customers, income levels, demographic factors Site factors: convenience and access, lighting and security, appearance and image, utilities, zoning, drawing power of the site, nearby businesses Costs

12. Manufacturing Location Factors Availability and costs of raw materials - needed materials may not be available everywhere Closeness to suppliers - Reduce transportation costs of perishable or bulky raw materials Nearness to customers Manufacturing customers may require technical service or frequent deliveries Being close to customers helps you learn about your market

13. Manufacturing Location Factors (2) Labor skills, availability, costs, and productivity Compare labor costs per unit. If labor productivity is low, costs per hour are misleading. Community attitudes toward the facility: is it wanted or not? Quality if life: climate, education, sports, culture, commuting, housing availability and costs, etc. Site considerations: local taxes, zoning and other regulations, financial incentives, utility availability and costs; access to highways, railroads, ports, airports

14. Should Firm Go Global? 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: Language barriers, different laws & regulations, different business cultures

15. Location Decision Example BMW decided to build its first major manufacturing plant outside Germany in Greer, South Carolina.

16. BMW: Country Decision Factors Market location U.S. is world’s largest luxury car market Growing (baby boomers) Labor Lower manufacturing labor costs $17/hr. (U.S.) vs. $27 (Germany) Higher labor productivity 11 holidays (U.S.) vs. 31 (Germany) Other Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity (lower cost/car $2,000-3000)

17. BMW: Region and Community Decision Factors Labor Lower wages in South Carolina S. C. g overnment incentives $135 million in state & local tax breaks Free-trade zone from airport to plant No duties on imported components or on exported cars State employment security service screened applications Greenville Technical College trained workers