Chapter 5, Part A
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Transcript of Chapter 5, Part A
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Facility Capacity and Location
Chapter 5, Part A
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Facility Planning
HOW MUCH long range capacity is needed WHEN additional capacity is needed WHERE the production facilities should be located WHAT the layout and characteristics of the facilities
should be
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Facility Planning
The capital investment in land, buildings, technology, and machinery is enormous
A firm must live with its facility planning decisions for a long time, and these decisions affect:
Operating efficiency Economy of scale Ease of scheduling Maintenance costs … Profitability!
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Long-RangeCapacity Planning
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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.
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Definitions of Capacity
In general, production capacity is the maximum production rate of an organization.
Capacity can be difficult to quantify due to … Day-to-day uncertainties such as employee
absences, equipment breakdowns, and material-delivery delays
Products and services differ in production rates (so product mix is a factor)
Different interpretations of maximum capacity
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Definitions of Capacity
The Federal Reserve Board defines sustainable practical capacity as the greatest level of output that a plant can maintain …
within the framework of a realistic work schedule taking account of normal downtime assuming sufficient availability of inputs to operate
the machinery and equipment in place
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Measurements of Capacity
Output Rate Capacity For a facility having a single product or a few
homogeneous products, the unit of measure is straightforward (barrels of beer per month)
For a facility having a diverse mix of products, an aggregate unit of capacity must be established using a common unit of output (sales dollars per week)
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Measurements of Capacity
Input Rate Capacity Commonly used for service operations where
output measures are particularly difficult Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month
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Measurements of Capacity
Capacity Utilization Percentage Relates actual output to output capacity
Example: Actual automobiles produced in a quarter divided by the quarterly automobile production capacity
Relates actual input used to input capacity Example: Actual accountant hours used in a
month divided by the monthly account-hours available
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Measurements of Capacity
Capacity Cushion an additional amount of capacity added onto the
expected demand to allow for: greater than expected demand demand during peak demand seasons lower production costs product and volume flexibility improved quality of products and services
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Forecasting Capacity Demand
Consider the life of the input (e.g. facility is 10-30 yr) Understand product life cycle as it impacts capacity Anticipate technological developments Anticipate competitors’ actions Forecast the firm’s demand
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Other Considerations
Resource availability Accuracy of the long-range forecast Capacity cushion Changes in competitive environment
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Expansion of Long-Term Capacity
Subcontract with other companies Acquire other companies, facilities, or resources Develop sites, construct buildings, buy equipment Expand, update, or modify existing facilities Reactivate standby facilities
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Reduction of Long-Term Capacity
Sell off existing resources, lay off employees Mothball facilities, transfer employees Develop and phase in new products/services
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Economies of Scale
Best operating level - least average unit cost Economies of scale - average cost per unit decreases
as the volume increases toward the best operating level
Diseconomies of scale - average cost per unit increases as the volume increases beyond the best operating level
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Economies and Diseconomies of Scale
Average UnitCost of Output ($)
Annual Volume (units)
Best Operating Level
Economiesof Scale
Diseconomiesof Scale
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Economies of Scale
Declining costs result from: Fixed costs being spread over more and more units Longer production runs result in a smaller
proportion of labor being allocated to setups Proportionally less material scrap … and other economies
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Diseconomies of Scale
Increasing costs result from increased congestion of workers and material, which contributes to:
Increasing inefficiency Difficulty in scheduling Damaged goods Reduced morale Increased use of overtime … and other diseconomies
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Two General Approaches to Expanding Long-Range Capacity
All at Once – build the ultimate facility now and grow into it
Incrementally – build incrementally as capacity demand grows
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Two General Approaches to Expanding Long-Range Capacity
All at Once Little risk of having to turn down business due to
inadequate capacity Less interruption of production One large construction project costs less than
several smaller projects Due to inflation, construction costs will be higher
in the future Most appropriate for mature products with stable
demand
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Two General Approaches to Expanding Long-Range Capacity
Incrementally Less risky if forecast needs do not materialize Funds that could be used for other types of
investments will not be tied up in excess capacity More appropriate for new products
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Subcontractor Networks
A viable alternative to larger-capacity facilities is to develop subcontractor and supplier networks.
“Farming out” or outsourcing your capacity needs to your suppliers
Developing long-range relationships with suppliers of parts, components, and subassemblies
Relying less on backward vertical integration Requiring less capital for production facilities More easily varying capacity during slack or peak
demand periods
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Outsourcing Service Functions
Building maintenance Data processing Delivery Payroll Bookkeeping Customer service Mailroom Benefits administration … and more
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Economies of Scope
The ability to produce many product models in one flexible facility more cheaply than in separate facilities
Highly flexible and programmable automation allows quick, inexpensive product-to-product changes
Economies are created by spreading the automation cost over many products
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Example: King Publishing
Break-Even AnalysisKing Publishing intends to publish a book in
residential landscaping. Fixed costs are $125,000 per year, variable costs per unit are $32, and selling price per unit is $42.
A) How many units must be sold per year to break even? B) How much annual revenue is required to break even? C) If annual sales are 20,000 units, what are the annual profits? D) What variable cost per unit would result in $100,000 annual profits if annual sales are 20,000 units?
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Example: King Publishing
Break-Even AnalysisA) How many units must be sold per year to break even?
Q = FC/(p-v) = $125,000/(42 – 32) = 12,500 books
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Example: King Publishing
Break-Even AnalysisB) How much annual revenue is required to break even?
TR = pQ = 42(12,500) = $525,000
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Example: King Publishing
Break-Even AnalysisC) If annual sales are 20,000 units, what are the annual
profits?
P = pQ – (FC + vQ) = 42(20,000) – [125,000 + 32(20,000)] = 840,000 – 125,000 – 640,000 = $75,000
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Example: King Publishing
Break-Even AnalysisD) What variable cost per unit would result in $100,000
annual profits if annual sales are 20,000 units?
P = pQ – (FC + vQ) 100,000 = 42(20,000) – [125,000 + v(20,000)] 100,000 = 840,000 – 125,000 – 20,000v 20,000v = 615,000 v = $30.75
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Decision Tree Analysis
Structures complex multiphase decisions, showing: What decisions must be made What sequence the decisions must occur Interdependence of the decisions
Allows objective evaluation of alternatives Incorporates uncertainty Develops expected values
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Example: Good Eats Café
Decision Tree Analysis Good Eats Café is about to build a new
restaurant. An architect has developed three building designs, each with a different seating capacity. Good Eats estimates that the average number of customers per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff table showing the profits for the three designs is on the next slide.
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Payoff Table
Average Number of Customers Per Hour c1 = 80 c2 = 100 c3 = 120
Design A $10,000 $15,000 $14,000 Design B $ 8,000 $18,000 $12,000 Design C $ 6,000 $16,000 $21,000
Example: Good Eats Café
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Expected Value ApproachCalculate the expected value for each decision.
The decision tree on the next slide can assist in this calculation. Here d1, d2, d3 represent the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur.
Example: Good Eats Café
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Decision Tree
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(.2)
(.4)
(.4)
(.4)
(.2)
(.4)
(.4)
(.2)
(.4)
d1
d2
d3
c1
c1
c1
c2
c3
c2
c2
c3
c3
Payoffs
10,000
15,000
14,000
8,000
18,000
12,000
6,000
16,000
21,000
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Example: Good Eats Café
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Expected Value For Each Decision
Choose the design with largest EV -- Design C.
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d1
d2
d3
EV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600
EV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600
EV = .4(6,000) + .2(16,000) + .4(21,000) = $14,000
Design A
Design B
Design C
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Example: Good Eats Café