Transcript Chapter 9– Capacity Planning & Facility Location Operations Management by R. Dan Reid & Nada R.

Chapter 9– Capacity Planning
& Facility Location
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
© Wiley 2010
1
Learning Objectives
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Define capacity planning
Define location analysis
Describe relationship between capacity
planning and location, and their importance
Explain the steps involved in capacity
planning and location analysis
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Learning Objectives – con’t
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Describe the decision support tools used for
capacity planning
Identify key factors in location analysis
Describe the decision support tools used for
location analysis
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Capacity planning
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Capacity is the maximum output rate of a facility
Capacity planning is the process of establishing the
output rate that can be achieved at a facility:
 Capacity is usually purchased in “chunks”
 Strategic issues: how much and when to spend
capital for additional facility & equipment
 Tactical issues: workforce & inventory levels, &
day-to-day use of equipment
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Measuring Capacity Examples
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There is no one best way to measure capacity
Output measures like kegs per day are easier to understand
With multiple products, inputs measures work better
Type of Business
Input Measures of
Capacity
Output Measures
of Capacity
Car manufacturer
Labor hours
Cars per shift
Hospital
Available beds
Patients per month
Pizza parlor
Labor hours
Pizzas per day
Retail store
Floor space in
square feet
Revenue per foot
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Measuring Available Capacity
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Design capacity:
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Maximum output rate under ideal conditions
A bakery can make 30 custom cakes per day
when pushed at holiday time
Effective capacity:
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Maximum output rate under normal (realistic)
conditions
On the average this bakery can make 20
custom cakes per day
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Measuring Effectiveness of
Capacity Use
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Measures how much of the available
capacity is actually being used:
actual output rate
100%
Utiliz atio
n
capacity
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Measures effectiveness
Use either effective or design capacity in
denominator
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Example of Computing Capacity Utilization: A bakery’s
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?
Utiliz atio
n effective 
Utiliz atio
n design
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actual output
28
(100%)  (100%)  140%
e ffe ctivecapacity
20
actual output
28

(100%)  (100%)  93%
de sign capacity
30
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
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Capacity Considerations
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The Best Operating Level is the output that results in
the lowest average unit cost
Economies of Scale:
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Where the cost per unit of output drops as volume of output
increases
Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
Diseconomies of Scale:
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Where the cost per unit rises as volume increases
Often caused by congestion (overwhelming the process with too
much work-in-process) and scheduling complexity
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Best Operating Level and Size
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Alternative 1: Purchase one large facility, requiring one large
initial investment
Alternative 2: Add capacity incrementally in smaller chunks as
needed
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Other Capacity Considerations
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Focused factories:
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Plant within a plant (PWP):
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Small, specialized facilities with limited
objectives
Segmenting larger operations into smaller
operating units with focused objectives
Subcontractor networks:
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Outsource non-core items to free up
capacity for what you do well
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Making Capacity Planning
Decisions
The three-step procedure for making
capacity planning decisions is as
follows:
1. Identify Capacity Requirements
2. Develop Capacity Alternatives
3. Evaluate Capacity Alternatives
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Identifying capacity
requirements
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Forecasting Capacity:
 Long-term capacity requirements based on future demand
 Identifying future demand based on forecasting
 Forecasting, at this level, relies on qualitative forecast models
 Executive opinion
 Delphi method
 Forecast and capacity decision must included strategic implications
Capacity cushions
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Plan to underutilize capacity to provide flexibility
Strategic Implications
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How much capacity a competitor might have
Potential for overcapacity in industry a possible hazard
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Developing & Evaluating Capacity
Alternatives
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Capacity alternatives include
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Could do nothing,
expand large now (may included
capacity cushion), or
expand small now with option to add
later
Use decision support aids to evaluate
decisions (decision tree most popular)
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Decision trees
Diagramming technique which uses
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Decision points – points in time when decisions
are made, squares called nodes
Decision alternatives – branches of the tree off
the decision nodes
Chance events – events that could affect a
decision, branches or arrows leaving circular
chance nodes
Outcomes – each possible alternative listed
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Decision tree diagrams
Decision trees developed by
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Drawing from left to right
Use squares to indicate decision points
Use circles to indicate chance events
Write the probability of each chance by the
chance (sum of associated chances = 100%)
Write each alternative outcome in the right
margin
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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? (see notes)
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Evaluating the Decision Tree
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Decision tree analysis utilizes expected value
analysis (EVA)
EVA is a weighted average of the chance events
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Probability of occurrence * chance event outcome
Refer to previous slide
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At decision point 2, choose to expand to maximize
profits ($200,000 > $150,000)
Calculate expected value of small expansion:
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EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000
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Evaluating the Decision
Tree con’t
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Calculate expected value of large expansion:
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EVlarge = 0.30($50,000) + 0.70($300,000) =
$225,000
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At decision point 1, compare alternatives &
choose the large expansion to maximize the
expected profit:
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$225,000 > $164,000
Choose large expansion despite the fact that
there is a 30% chance it’s the worst decision:
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Take the calculated risk!
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Location Analysis
Three most important factors in real estate:
1. Location
2. Location
3. Location
Facility location is the process of identifying
the best geographic location for a service
or production facility
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Factors Affecting Location
Decisions
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Proximity to source of supply:
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Proximity to customers:
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Reduce transportation costs of perishable or bulky
raw materials
High population areas, close to JIT partners
Proximity to labor:
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Local wage rates, attitude toward unions,
availability of special skills (silicon valley)
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More Location Factors
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Community considerations:
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Site considerations:
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Local zoning & taxes, access to utilities, etc.
Quality-of-life issues:
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Local community’s attitude toward the facility (prisons,
utility plants, etc.)
Climate, cultural attractions, commuting time, etc.
Other considerations:
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Options for future expansion, local competition, etc.
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Globalization –
Should Firm Go Global?
Globalization is the process of locating facilities
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around the world
Potential advantages:
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Potential disadvantages:
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Inside track to foreign markets, avoid trade barriers, gain access
to cheaper labor
Political risks may increase, loss of control of proprietary
technology, local infrastructure (roads & utilities) may be
inadequate, high inflation
Other issues to consider:
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Language barriers, different laws & regulations, different
business cultures
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Making Location Decisions
Analysis should follow 3 step process:
1.
2.
3.
Identify dominant location factors
Develop location alternatives
Evaluate locations alternatives
Procedures for evaluation location alternatives
include
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Factor rating method
Load-distance model
Center of gravity approach
Break-even analysis
Transportation method
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Factor Rating Example
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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.
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Calculate the rectilinear distance: dAB  30  10  40  15  45 miles
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Multiply by the number of loads between each site and the four cities
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Calculating the Load-Distance Score
for Springfield vs. Mansfield
Computing the Load-Distance Score for Springfield
 City
Load
Distance
ld
Cleveland
15
20.5
307.5
Columbus
10
4.5
45
Cincinnati
12
7.5
90
Dayton
4
3.5
14
Total
Load-Distance Score(456.5)
Computing the Load-Distance Score for Mansfield
City
Load
Distance
ld
Cleveland
15
8
120
Columbus
10
8
80
Cincinnati
12
20
240
Dayton
4
16
64
Total
Load-Distance Score(504)
The load-distance score for Mansfield is higher than for
Springfield. The warehouse should be located in Springfield.
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The Center of Gravity Approach
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This approach requires that the analyst find the center of
gravity of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Location
Cleveland
Columbus
Cincinnati
Dayton
Coordinates
Load
(X,Y)
(11,22)
(10,7)
(4,1)
(3,6)
(li)
15
10
12
4
41
Total
lixi
165
165
165
165
325
liyi
330
70
12
24
436
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Computing the Center of Gravity for Matrix Manufacturing
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l X 325
l Y 436
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X 

 7.9 ; Y 

 10.6
l
41
 lto the41C.G. that
Is there another possible 
warehouse location closer
i
i
i
c.g.
i
c.g.
i
i
should be considered?? Why?
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Break-Even Analysis
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Break-even analysis computes the amount of goods required
to be sold to just cover costs
Break-even analysis includes fixed and variable costs
Break-even analysis can be used for location analysis
especially when the costs of each location are known
Step 1: For each location, determine the fixed and
variable costs
Step 2: Plot the total costs for each location on one graph
Step 3: Identify ranges of output for which each location
has the lowest total cost
Step 4: Solve algebraically for the break-even points
over the identified ranges
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Break-Even Analysis
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Remember the break even equations used for calculation total
cost of each location and for calculating the breakeven
quantity Q.
 Total cost = F + cQ
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Total revenue = pQ
Break-even is where Total Revenue = Total Cost
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
Q = F/(p-c)
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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.
Example 9.6 Using Break-Even Analysis
Location Fixed Cost Variable Cost Total Cost
A $350,000 $ 5(10,000) $400,000
B $170,000 $25(10,000) $420,000
C $100,000 $40(10,000) $500,000
D $250,000 $20(10,000) $450,000
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The Transportation Method
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Can be used to solve specific location problems
Is discussed in detail in the supplement to this text
Could be used to evaluate the cost impact of
adding potential location sites to the network of
existing facilities
Could also be used to evaluate adding multiple
new sites or completely redesigning the network
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Capacity Planning & Facility
Location within OM
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Decisions about capacity and location are highly
dependent on forecasts of demand (Ch 8).
Capacity is also affected by operations strategy (Ch
2), as size of capacity is a key element of
organizational structure.
Other operations decisions that are affected by
capacity and location are issues of job design and
labor skills (Ch 11), choice on the mix of labor and
technology, as well as choices on technology and
automation (Ch 3).
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Capacity Planning and Facility
Location Across the Organization
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Capacity planning and location analysis
affect operations management and are
important to many others
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Finance provides input to finalize capacity
decisions
Marketing impacted by the organizational
capacity and location to customers
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Chapter 9 Highlights
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Capacity 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 analysis
decision are often made simultaneously
because the location of the facility is usually
related to its capacity.
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Chapter 9 Highlights – con’t
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In both capacity planning and location analysis,
managers must follow three-step process to make
good decision. The steps are assessing needs,
developing alternatives, and evaluating
alternatives.
To choose between capacity planning alternatives
managers may use decision trees, which are a
modeling tool for evaluating independent
decisions that must be made in sequence.
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Chapter 9 Highlights – con’t
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Key factors in location analysis included proximity
to customers, transportation, source of labor,
community attitude, and proximity to supplies.
Service and manufacturing firms focus on different
factors. Profit-making and nonprofit organizations
also focus on different factors.
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Chapter 9 Highlights – con’t
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Several tools can be used to facilitate location
analysis. Factor rating is a tool that helps
managers evaluate qualitative factors. The loaddistance 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.
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Chapter 9 Homework Hints
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Problem 9.5: calculate utilizations based on
design and effective capacities (see example
9.1). Present conclusions.
Problem 9.14: use factor rating method to
compare the possible locations (see example
9.3).
Problem 9.15: use load-distance model to
compare locations (see example 9.4).
Problem 9.16: use center-of-gravity method.
Use data from problem 15 (e.g. load between
city and warehouse) to determine desired
coordinates for the new warehouse.