Strategic Capacity Planning and Facility Location 2

Strategic Capacity Planning What Size Should the Operations System Be? 3

Capacity Problems Movie theaters Electrical energy-California MTSU

Capacity Amount of resource inputs available relative to output requirements at a particular time Some measurements of capacity Output rate capacity Aggregate capacity Input rate capacity Percentage of capacity utilization Strategic capacity planning specifies the overall capacity level of resources that best supports the firm’s long range competitive strategy MTSU 4

Capacity Planning Considerations in Changing Capacity Alternatives When Changing Capacity Determining Capacity Requirements MTSU 6

Considerations in Changing Capacity Maintaining System Balance Frequency of Capacity Changes External Sources of Capacity Subcontractor networks Sharing capacity Supplier networks MTSU 7

Expansion of Long-Term Capacity Subcontract Acquire capacity Develop new sites Expand current sites Reactivate standby facilities MTSU 8

Reduction of Long-Term Capacity Sell off existing facilities Mothball facilities Develop and phase in new products/services MTSU 9

Steps in the Capacity Planning Process Estimate the capacity of the present facilities Forecast the long-range future capacity needs Identify and analyze sources of capacity to meet these needs Select from among the alternative sources of capacity MTSU 10

Forecasting Capacity Demand Long-range forecast of market demand Estimate the firm’s market share Multiply the forecasted market demand by the estimated market share Adjust for utilization and efficiency factors Translate firm’s demand into machine and labor capacity needs MTSU 11

Importance of Capacity Decisions Impact the ability of the firm to meet future demands for products and services Affect operating costs Usually a major determinant of initial cost Involves long-term commitment of resources and difficult to modify Affect competitiveness MTSU

Types of Capacity Design capacity Effective capacity Actual output maximum obtainable output Effective capacity Maximum capacity given product mix, scheduling difficulties, and other doses of reality. Actual output rate of output actually achieved--cannot exceed effective capacity. MTSU

Efficiency and Utilization Actual output Efficiency = Effective capacity Utilization = Design capacity MTSU

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Actual output 36 units/day Efficiency = = = 90% Effective capacity 40 units/ day Actual output 36 units/day Utilization = = = 72% Design capacity 50 units/day MTSU

Production units have an optimal rate of output for minimal cost. Optimal Output Rate Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost Rate of output MTSU

Minimum cost & optimal operating rate are functions of size of production unit Small facility Average cost per unit Medium facility Large facility Output rate MTSU

Other Considerations Resource availability The experience curve Focus Flexibility Economies of scope Accuracy of the long-range forecast Capacity cushion Changes in competitive environment MTSU 12

Decision Approaches Break-even Analysis Present-value Analysis Decision Tree Analysis Computer Simulation Waiting Line Analysis Linear Programming MTSU 15

Planning Service Capacity Timing Services cannot be stored for later use Capacity must be available to produce a service at the time when it is needed Location For high contact services, capacity must be located near the customer Volatility of Demand Services cannot be stored Customers interact directly with the system and each may have different requirements Directly affected by consumer behavior MTSU 16

Facility Location MTSU 17

Some Reasons the Facility Location Decision Arises (1 of 2) Changes in the market Expansion Contraction Geographic shift Changes in inputs Labor skills and/or costs Materials costs and/or availability Utility costs MTSU 18

Reasons (2 of 2) Changes in the environment Regulations and laws Attitude of the community MTSU 19

Characteristics of the Facility Location Decision Infrequent Expensive to implement Studied and evaluated extensively Determination of a site involves narrowing the scope of the area being considered Involves a long-term commitment MTSU 20

Some Factors Affecting the Location Decision (1 of 2) Economic Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes MTSU 21

Factors (2 of 2) Noneconomic Proximity to customers Labor attitudes and traditions Training and employment services Community’s attitude Schools and churches Recreation and cultural attractions Amount and type of housing available Political risk Location of other facilities MTSU 22

Analyzing Service Location Decisions Consumer behavior research Market research Data gathering for each location alternative Revenue projection for each location alternative Profit projection for each location alternative MTSU 23

Examples of Decision Approaches Break-even Analysis Rating Scale Relative-Aggregate-Scores Present-value Analysis Cost Minimization Models Center of gravity method Decision Tree Analysis Computer Simulation Linear Programming MTSU 24

MTSU 25