1. Capacity and Location Planning
Chapter 5
Capacity and Location Planning
Chapter 5: Capacity and Location Planning

2. Chapter 5: Capacity and Location Planning
Examples
Chapter 5: Capacity and Location Planning

3. Chapter 5: Capacity and Location Planning
Burger King
Highly variable demand
During lunch hour, demand can increase from 40 to 800 hamburgers/hour
Limited in ability to used inventory
Facilities designed for flexible capacity
During off peak times drive through staffed by one worker
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4. Chapter 5: Capacity and Location Planning
Burger King continued
During lunch hour drive through staffed by up to five workers who divide up the duties
Second window can be used for customer with special orders
Average transaction time reduced from 45 to 30 seconds
Sales during peak periods increased 50%
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Burger King continued
Payroll costs as large as food costs
Need to keep costs low but at same time meet highly variable demand
BK-50 restaurant is 35% smaller and costs 27% less to build, but can handle 40% more sales with less labor
Chapter 5: Capacity and Location Planning

6. Semiconductor Industry
Learning from the steel industry
Both industries require large and expensive factories
1980s steel industry started to abandon economies of scale justification and built minimills
Chipmakers are now constructing smaller and more automated wafer fabs
Chapter 5: Capacity and Location Planning

7. Semiconductor Industry continued
Short life cycles make it difficult to recoup $2 billion it will cost to build wafer fab in 1998
Payback time is month to conventional wafer fab versus 10 months for minifab
Processing time can be reduced from days to 7 days.
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8. Chapter 5: Capacity and Location Planning
Mercedes-Benz
Early 1990s investigated feasibility of producing luxury sports utility vehicle
Project team established to find location for new plant
Team charged with finding plant outside of Germany
Team initially narrowed search to North America
Chapter 5: Capacity and Location Planning

9. Mercedes-Benz continued
Team determined that North America location would minimize combined labor, shipping, and components cost
Plans indicated production volume of 65,000 vehicles per year and a breakeven volume of 40,000 vehicles
Sites further narrowed to sites within US
Close to primary market
Chapter 5: Capacity and Location Planning

10. Mercedes-Benz continued
Minimize penalties associated with currency fluctuations
100 sites in 35 state identified
Primary concern was transportation cost
Since half production was for export, focused on sites close to seaports, rail lines, and major highways
Chapter 5: Capacity and Location Planning

11. Mercedes-Benz continued
Worker age and mix of skills also considered
Sites narrowed to sites in NC, SC, and AL
These sites relatively equal in terms of business climate, education level, transportation, and long-term costs
AL chosen due to perception of high dedication to the project
Chapter 5: Capacity and Location Planning

12. Geographic Information Systems
View and analyze data on digital maps
Retail store in WI analyzed sales data on a map
The map demonstrated that each store drew majority of sales from 20 mile radius
Map highlighted area where only 15% of potential customers had visited one of its stores
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Sport Obermeyer
Highly volatile demand
Combined costs of stockouts and markdowns can exceed manufacturing costs
Determine which items can and cannot be predicted well
Products that can be predicted produced furthest in advance
Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s
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14. Chapter 5: Capacity and Location Planning
Insights
Capacity planning applies to both manufacturing and service organizations
Capacity options can be categorized as short-term or long-term
Changing staffing level is short-term
Building new minifab is long-term
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15. Chapter 5: Capacity and Location Planning
Insights continued
Semiconductor industry illustrates the enormous cost often associated with expanding capacity
Shorter product life cycles add further complications
Volatile demand can further complicate capacity planning
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16. Chapter 5: Capacity and Location Planning
Introduction
Capacity needs determined on the basis of forecast of demand.
In addition to determining capacity needed, the location of the capacity must also be determined.
Mercedes-Benz example illustrates that location decisions are often made in stages.
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17. Chapter 5: Capacity and Location Planning
Sport Obermeyer
Highly volatile demand
Combined costs of stockouts and markdowns can exceed manufacturing costs
Determine which items can and cannot be predicted well
Products that can be predicted produced furthest in advance
Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s
Chapter 5: Capacity and Location Planning

18. Forecasting Purposes and Methods
Chapter 5: Capacity and Location Planning

19. Primary Uses of Forecasting
To determine if sufficient demand exists
To determine long-term capacity needs
To determine midterm fluctuations in demand so that short-sighted decisions are not made that hurt company in long-run
To determine short-term fluctuations in demand for production planning, workforce scheduling, and materials planning
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20. Chapter 5: Capacity and Location Planning
Forecasting Methods
Informal (intuitive)
Formal
Quantitative
Qualitative
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21. Chapter 5: Capacity and Location Planning
Forecasting Methods
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22. Chapter 5: Capacity and Location Planning
Qualitative Methods
Life cycle
Surveys
Delphi
Historical analogy
Expert opinion
Consumer panels
Test marketing
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23. Chapter 5: Capacity and Location Planning
Quantitative Methods
Causal
Input-output
Econometric
Box-Jenkins
Autoprojection
Multiplicative
Exponential smoothing
Moving average
Chapter 5: Capacity and Location Planning

24. Choosing a Forecasting Method
Availability of representative data
Time and money limitations
Accuracy needed
Chapter 5: Capacity and Location Planning

25. Long-Term Capacity/Location Planning
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26. Chapter 5: Capacity and Location Planning
Terminology
Maximum rate of output of the transformation system over some specified duration
Capacity issues applicable to all organizations
Often services cannot inventory output
Bottlenecks
Yield (or revenue) management
Chapter 5: Capacity and Location Planning

27. Long-term Capacity Planning
Unit cost as function of facility size
Economies of scale
Economies of scope
Chapter 5: Capacity and Location Planning

28. Envelope of Lowest Unit Output Costs with Facility Size
Chapter 5: Capacity and Location Planning

29. Demand and Life Cycles for Multiple Outputs
Demand Seasonality
Output Life Cycles
Chapter 5: Capacity and Location Planning

30. Anti-cyclic Product Sales
Chapter 5: Capacity and Location Planning

31. Forecast of Required Organizational Capacity from Multiple Life Cycles
Chapter 5: Capacity and Location Planning

32. Timing of Capacity Increments
Chapter 5: Capacity and Location Planning

33. Location Planning Strategies
Chapter 5: Capacity and Location Planning

34. Capabilities and the Location Decision
Often driven too much by short-term considerations
wage rates
exchange rates
Better approach is to consider how location impacts development of long-term capabilities
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35. Chapter 5: Capacity and Location Planning
Six Step Process
Identify sources of value
Identify capabilities needed
Assess implications of location decision on development of capabilities
Identify potential locations
Evaluate locations
Develop strategy for building network of locations
Chapter 5: Capacity and Location Planning

36. Stage 1: Regional-International
Minimize transportation costs and provide acceptable service
Proper supply of labor
Wage rates
Unions (right-to-work laws)
Regional taxes, regulations, trade barriers
Political stability
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Stage 2: Community
Availability of acceptable sites
Local government attitudes
Regulations, zoning, taxes, labor supply
Tax Incentives
Community’s attitude
Amenities
Chapter 5: Capacity and Location Planning

38. Breakeven Location Model
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Stage 3: Site
Size
Adjoining land
Zoning
Drainage
Soil
Availability of water, sewers, utilities
Development costs
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Weighted Score Model
Wi = importance of factor i
Si = score of location being evaluated on
factor i
i = an index for the factors
Chapter 5: Capacity and Location Planning

41. Locating Pure Service Organizations
Recipient to Facility
facility utilization
travel distance per citizen
travel distance per visit
Facility to Recipient
Chapter 5: Capacity and Location Planning

42. Short Term Capacity Planning
Chapter 5: Capacity and Location Planning

43. Bottlenecks in Sequential Operations
Chapter 5: Capacity and Location Planning

44. Efficiency and Output Increase when Machines are Being Added
Chapter 5: Capacity and Location Planning

45. Product and Service Flows
Chapter 5: Capacity and Location Planning

46. Process Flow Map for a Service
Chapter 5: Capacity and Location Planning

47. Implementing the Theory of Constraints
Identify the system’s constraints
Exploit the constraint
Subordinate all else to the constraint
Elevate the constraint
If constraint is no longer a bottleneck, find the next constraint and repeat the steps.
Chapter 5: Capacity and Location Planning

48. Relationship between Capacity and Scheduling
Capacity is oriented toward the acquisition of productive resources
Scheduling related to the timing of the use of resources
Chapter 5: Capacity and Location Planning

49. Gantt Charts for Capacity Planning and Scheduling (Infeasible)
Chapter 5: Capacity and Location Planning

50. Gantt Charts for Capacity Planning and Scheduling (Feasible)
Chapter 5: Capacity and Location Planning

51. Short-Term Capacity Alternatives
Increase resources
Improve resource use
Modify the output
Modify the demand
Do not meet demand
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Increase Resources
Overtime
Add shifts
Employ part-time workers
Use floating workers
Subcontract
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Improve Resource Use
Overlap or stagger shifts
Schedule appointments
Inventory output
Backlog demand
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Modify the Output
Standardize the output
Have recipient do part of the work
Transform service operations into inventoriable product operations
Cut back on quality
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Demand Options
Modify the Demand
change the price
change the promotion
Do Not Meet Demand
Chapter 5: Capacity and Location Planning

56. Capacity Planning for Services
Large fluctuations in demand
Inventory often not an option
Problem often is to match staff availability with customer demand
May attempt to shift demand to off-peak periods
Can measure capacity in terms of inputs
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The Learning Curve
Chapter 5: Capacity and Location Planning

58. Chapter 5: Capacity and Location Planning
Background
In airframe manufacturing industry observed that each time output doubled, labor hour per plane decreased by fixed percentage
Chapter 5: Capacity and Location Planning

59. Learning Curve Function
M = mNr
M = labor-hours for Nth unit
m = labor-hours for first unit
N = number of units produced
r = exponent of curve
= log(learning rate)/0.693
Chapter 5: Capacity and Location Planning

60. Typical Pattern of Learning and Forgetting
Chapter 5: Capacity and Location Planning

61. Queuing and the Psychology of Waiting
Chapter 5: Capacity and Location Planning

62. Waiting-Line Analysis
Mechanism to determine several key performance measures of operating system.
Trade-off two costs
cost of waiting
cost of service
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63. Chapter 5: Capacity and Location Planning
Waiting Line Analysis
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Principles of Waiting
Unoccupied time feels longer than occupied time.
Pre-service waiting feels longer than in-service waiting.
Anxiety makes waiting seem longer.
Uncertain waiting is longer than known, finite waiting.
Chapter 5: Capacity and Location Planning

65. Principles of Waiting continued
Unexplained waiting is longer than explained waiting.
Unfair waiting is longer than fair waiting.
Solo waiting is longer than group waiting.
The more valuable the service, the longer it is worth waiting for.
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66. Chapter 5: Capacity and Location Planning