Capacity Planning and Facility Location Chapter 9

MGMT 326 Foundations of Operations Introduction Strategy Managing Projects Quality Assurance Capacity and Facilities Planning & Control Products & Processes Product Design Process Design Managing Quality Statistical Process Control Just-in-Time & Lean Systems Capacity and Location

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

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

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 25 custom cakes per day

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

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.

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

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

Manufacturing Location Factors (2) Labor skills, availability, costs, and productivity Community attitudes toward the facility: is it wanted or not? Quality of 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

Reasons that Companies Globalize (Advantages of Globalization) To get access to cheaper labor To get access to materials To enter new markets and gain market knowledge To avoid paying tariffs

Potential Disadvantages of Globalization Political risk: the risk that a government will do things that hurt your business Example: 6 major U. S. and European oil companies owned oil wells and pipelines in Venezuela. The Venezuelan government forced the companies to either shut down or sell a controlling interest in their businesses to the government.

Potential Disadvantages of Globalization (2) Loss of control of proprietary technology Example: General Motors produces a sub-compact car, the Chery, in China. GM’s Chinese partner used GM’s product and process technology to produce a very similar car and compete with GM.

Potential Disadvantages of Globalization (3) Infrastructure (roads, railroads, utilities, ports, and communication systems) may be inadequate. Example: Many manufacturing plants in China are located in remote areas. Goods for U. S. markets must be transported to a Chinese port for shipment to the U.S. Poor roads increase the time required to transport goods to a port. Similar problems occur in many developing countries.

Potential Disadvantages of Globalization (4) Productivity is often lower than it is in the U. S. Production rates may be lower than expected. Production costs may be higher than expected. The quality of goods or services may be lower than expected. Different languages and communication styles

Potential Disadvantages of Globalization (5) Laws and regulations are different Example: The European Union has different product standards from the U.S. Business cultures and practices are different. Example: Suppliers in Mexico may not be accustomed to delivering raw materials on a strict schedule.

Deciding Whether to Pursue a Global Opportunity Set strategic goals. Gather data about costs, benefits, and risks. Market analysis Financial analysis Operations analysis Risk analysis and management Make a decision