Wiley 2010*Chapter 9 Capacity Planning & Facility LocationOperations ManagementbyR. Dan Reid & Nada R. Sanders4th Edition Wiley 2010

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Wiley 2010*Learning ObjectivesDefine capacity planningDefine location analysisDescribe relationship between capacity planning and location, and their importance Explain the steps involved in capacity planning and location analysis

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Wiley 2010*Learning Objectives contDescribe the decision support tools used for capacity planningIdentify key factors in location analysisDescribe the decision support tools used for location analysis

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Wiley 2010*Capacity planningCapacity is the maximum output rate of a facilityCapacity planning is the process of establishing the output rate that can be achieved at a facility:Capacity is usually purchased in chunksStrategic issues: how much and when to spend capital for additional facility & equipmentTactical issues: workforce & inventory levels, & day-to-day use of equipment

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Wiley 2010*Measuring Capacity ExamplesThere is no one best way to measure capacityOutput measures like kegs per day are easier to understand With multiple products, inputs measures work better

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Wiley 2010*Measuring Available CapacityDesign capacity:Maximum output rate under ideal conditionsA bakery can make 30 custom cakes per day when pushed at holiday timeEffective capacity:Maximum output rate under normal (realistic) conditionsOn the average this bakery can make 20 custom cakes per day

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Wiley 2010*Measuring Effectiveness of Capacity UseMeasures how much of the available capacity is actually being used:

Measures effectivenessUse either effective or design capacity in denominator

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Wiley 2010*Example of Computing Capacity Utilization: A bakerys design capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes per day. What is the bakerys capacity utilization relative to both design and effective capacity? The current utilization is only slightly below its design capacity and considerably above its effective capacityThe bakery can only operate at this level for a short period of time

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Wiley 2010*Capacity ConsiderationsThe Best Operating Level is the output that results in the lowest average unit costEconomies of Scale:Where the cost per unit of output drops as volume of output increasesSpread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material Diseconomies of Scale:Where the cost per unit rises as volume increasesOften caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity

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Wiley 2010*Best Operating Level and SizeAlternative 1: Purchase one large facility, requiring one large initial investmentAlternative 2: Add capacity incrementally in smaller chunks as needed

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Wiley 2010*Other Capacity ConsiderationsFocused factories:Small, specialized facilities with limited objectives Plant within a plant (PWP):Segmenting larger operations into smaller operating units with focused objectivesSubcontractor networks:Outsource non-core items to free up capacity for what you do well

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Wiley 2010*Making Capacity Planning DecisionsThe three-step procedure for making capacity planning decisions is as follows:Identify Capacity RequirementsDevelop Capacity AlternativesEvaluate Capacity Alternatives

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Wiley 2010*Identifying capacity requirementsForecasting Capacity:Long-term capacity requirements based on future demandIdentifying future demand based on forecastingForecasting, at this level, relies on qualitative forecast modelsExecutive opinionDelphi methodForecast and capacity decision must included strategic implicationsCapacity cushions Plan to underutilize capacity to provide flexibilityStrategic ImplicationsHow much capacity a competitor might havePotential for overcapacity in industry a possible hazard

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Wiley 2010*Developing & Evaluating Capacity AlternativesCapacity alternatives includeCould do nothing, expand large now (may included capacity cushion), orexpand small now with option to add laterUse decision support aids to evaluate decisions (decision tree most popular)

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Wiley 2010*Decision treesDiagramming technique which usesDecision points points in time when decisions are made, squares called nodesDecision alternatives branches of the tree off the decision nodesChance events events that could affect a decision, branches or arrows leaving circular chance nodesOutcomes each possible alternative listed

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Wiley 2010*Decision tree diagramsDecision trees developed byDrawing from left to rightUse squares to indicate decision pointsUse circles to indicate chance eventsWrite 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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Wiley 2010*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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Wiley 2010*Evaluating the Decision TreeDecision tree analysis utilizes expected value analysis (EVA)EVA is a weighted average of the chance eventsProbability of occurrence * chance event outcomeRefer to previous slideAt decision point 2, choose to expand to maximize profits ($200,000 > $150,000)Calculate expected value of small expansion:EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000

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Wiley 2010*Evaluating the Decision Tree contCalculate expected value of large expansion:EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit:$225,000 > $164,000Choose large expansion despite the fact that there is a 30% chance its the worst decision:Take the calculated risk!

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Wiley 2010*Location Analysis Three most important factors in real estate:LocationLocationLocationFacility location is the process of identifying the best geographic location for a service or production facility

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Wiley 2010*Factors Affecting Location DecisionsProximity to source of supply:Reduce transportation costs of perishable or bulky raw materialsProximity to customers:High population areas, close to JIT partnersProximity to labor:Local wage rates, attitude toward unions, availability of special skills (silicon valley)

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Wiley 2010*More Location FactorsCommunity considerations:Local communitys attitude toward the facility (prisons, utility plants, etc.)Site considerations:Local zoning & taxes, access to utilities, etc.Quality-of-life issues:Climate, cultural attractions, commuting time, etc.Other considerations:Options for future expansion, local competition, etc.

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Wiley 2010*Globalization Should Firm Go Global?Globalization is the process of locating facilities around the worldPotential advantages:Inside track to foreign markets, avoid trade barriers, gain access to cheaper laborPotential disadvantages:Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflationOther issues to consider:Language barriers, different laws & regulations, different business cultures

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Wiley 2010*Making Location DecisionsAnalysis should follow 3 step process:Identify dominant location factorsDevelop location alternativesEvaluate locations alternativesProcedures for evaluation location alternatives includeFactor rating methodLoad-distance modelCenter of gravity approachBreak-even analysisTransportation method

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Wiley 2010*Factor Rating Example

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Wiley 2010*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.Calculate the rectilinear distance:

Multiply by the number of loads between each site and the four cities

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Wiley 2010*Calculating the Load-Distance Score for Springfield vs. MansfieldThe load-distance score for Mansfield is higher than for Springfield. The warehouse should be located in Springfield.

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Wiley 2010*The Center of Gravity ApproachThis approach requires that the analyst find the center of gravity of the geographic area being considered

Computing the Center of Gravity for Matrix Manufacturing

Is there another possible warehouse location closer to the C.G. that should be considered?? Why?

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Wiley 2010*Break-Even AnalysisBreak-even analysis computes the amount of goods required to be sold to just cover costsBreak-even analysis includes fixed and variable costsBreak-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 costsStep 2: Plot the total costs for each location on one graphStep 3: Identify ranges of output for which each location has the lowest total costStep 4: Solve algebraically for the break-even points over the identified ranges

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Wiley 2010*Break-Even Analysis

Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q. Total cost = F + cQTotal revenue = pQBreak-even is where Total Revenue = Total Cost

Q = F/(p-c)Q = break-even quantityp = price/unitc = variable cost/unitF = fixed cost

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Wiley 2010*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.

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Wiley 2010*The Transportation MethodCan be used to solve specific location problemsIs discussed in detail in the supplement to this textCould be used to evaluate the cost impact of adding potential location sites to the network of existing facilitiesCould also be used to evaluate adding multiple new sites or completely redesigning the network

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Wiley 2010*Capacity Planning & Facility Location within OMDecisions 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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Wiley 2010*Capacity Planning and Facility Location Across the OrganizationCapacity planning and location analysis affect operations management and are important to many othersFinance provides input to finalize capacity decisionsMarketing impacted by the organizational capacity and location to customers

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Wiley 2010*Chapter 9 HighlightsCapacity planning is deciding on the maximum output rate of a facilityLocation analysis is deciding on the best location for a facilityCapacity 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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Wiley 2010*Chapter 9 Highlights contIn 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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Wiley 2010*Chapter 9 Highlights contKey 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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Wiley 2010*Chapter 9 Highlights contSeveral tools can be used to facilitate location analysis. Factor rating is a tool that helps managers evaluate qualitative factors. The load-distance 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 HintsProblem 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.

*****************The likelihood of demand being high is .70The likelihood of demand being low is .30Large expansion yields profits of $300K(high dem.) or $50k(low dem.)Small expansion yields profits of $80K if demand is lowSmall expansion followed by high demand and later expansion yield a profit of $200K at that point. No expansion at that point yields profit of $150K

**************From the graph you can see that the two lowest cost intersections occur between C & B (4667 units) and B & A (9000 units)The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and above 9000 units the best site is A

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