Prodman Report

7/27/2019 Prodman Report

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Chapter 9

Capacity & Location

Decisions


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Learning Objectives2

Define capacity planning

Define location analysis

Describe relationship between capacity planning andlocation, and their importance

Explain the steps involved in capacity planning andlocation analysis


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Learning Objectives3

Describe the decision support tools used for capacityplanning

Identify key factors in location analysis Describe the decision support tools used for location

analysis


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Capacity planning4

Capacityis the maximum output rate of a facility

Capacity planningis 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 foradditional facility & equipment

Tactical issues: workforce & inventory levels, & day-to-day useof equipment


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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, inputs measures work better

Type of BusinessInput 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 storeFloor space in

square feetRevenue per foot

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Measuring Available Capacity6

Design capacity:

Maximum output rate under ideal conditions

A bakery can make 30 custom cakes per daywhen pushed at holiday time

Effective capacity:

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

Measures how much of the availablecapacity is actually being used:

Measures effectiveness

Use either effective or design capacity indenominator

100%capacity

rateoutputactualnUtilizatio

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A bakerys design capacity is 30 custom cakes per day. Currentlythe bakery is producing 28 cakes per day. What is the bakerys

capacity utilization relative to both design and effective capacity?

93%(100%)30

28(100%)

capacitydesign

outputactualnUtilizatio

140%(100%)20

28(100%)

capacityeffective

outputactualnUtilizatio

design

effective

The current utilization is only slightly below its designcapacity and considerably above its effective capacity

The bakery can only operate at this level for a short periodof time

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Example of Computing CapacityUtilization:


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Capacity Considerations9

The Best Operating Level is the output that results inthe lowest average unit cost

Economies of Scale: 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: Where the cost per unit rises as volume increases

Often caused by congestion (overwhelming the process with toomuch work-in-process) and scheduling complexity


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Best Operating Level and Size

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 Considerations11

Focused factories:

Small, specialized facilities with limited

objectives Plant within a plant (PWP):

Segmenting larger operations into smalleroperating units with focused objectives

Subcontractor networks: Outsource non-core items to free up capacity

for what you do well


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Making Capacity Planning Decisions12

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 requirements13

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 Plan to underutilize capacity to provide flexibility

Strategic Implications How much capacity a competitor might have Potential for overcapacity in industry a possible hazard


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Developing & Evaluating CapacityAlternatives

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Capacity alternatives include

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 trees15

Diagramming technique which uses Decision points points in time when decisions are made,

squares called nodes

Decision alternatives branches of the tree off the decisionnodes

Chance events events that could affect a decision, branchesor arrows leaving circular chance nodes

Outcomes each possible alternative listed


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Decision tree diagrams16

Decision trees developed by

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 ofassociated chances = 100%)

Write each alternative outcome in the right margin


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A restaurant owner has determined that she needs to expand her facility.The alternatives are to expand large now and risk smaller demand, orexpand 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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Example Using Decision Trees:


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Evaluating the Decision Tree18

Decision tree analysis utilizes expected valueanalysis (EVA)

EVA is a weighted average of the chance events Probability of occurrence * chance event outcome

Refer to previous slide

At 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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Evaluating the Decision Tree19

Calculate expected value of large expansion:

EVlarge = 0.30($50,000) + 0.70($300,000) =

$225,000At decision point 1, compare alternatives & choose

thelarge expansion to maximize the expectedprofit:

$225,000 > $164,000

Choose large expansion despite the fact thatthere is a 30% chance its the worst decision:

Take the calculated risk!


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Location Analysis20

Three most important factors in real estate:

1. Location

2. Location3. Location

Facilitylocation is the process of identifying the bestgeographic location for a service or production

facility


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Factors Affecting Location Decisions21

Proximity to source of supply:

Reduce transportation costs of perishable or bulky rawmaterials

Proximity to customers: High population areas, close to JIT partners

Proximity to labor:

Local wage rates, attitude toward unions, availability of

special skills (silicon valley)


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More Location Factors22

Community 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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Globalization Should Firm Go Global?

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Globalization is the process of locating facilitiesaround the world

Potential advantages: Inside track to foreign markets, avoid trade barriers, gain access to

cheaper labor

Potential disadvantages: Political risks may increase, loss of control of proprietary

technology, local infrastructure (roads & utilities) may be

inadequate, high inflation Other issues to consider: Language barriers, different laws & regulations, different business

cultures


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Making Location Decisions24

Analysis should follow 3 step process:1. Identify dominant location factors

2. Develop location alternatives

3. Evaluate locations alternativesProcedures for evaluation location alternatives

include Factor rating method

Load-distance model

Center of gravity approach

Break-even analysis

Transportation method


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Factor Rating Example25


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A Load-Distance Model Example: Matrix Manufacturing isconsidering where to locate its warehouse in order to service its fourOhio stores located in Cleveland, Cincinnati, Columbus, Dayton. Twosites 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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miles4515401030dAB


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Calculating the Load-Distance Scorefor Springfield vs. Mansfield

The load-distance score for Mansfield is higher than forSpringfield. The warehouse should be located in Springfield.

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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 14Total 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 64Total Load-Distance Score(504)


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The Center of Gravity Approach

This approach requires that the analyst find the center ofgravity of the geographic area beingconsidered

Computing the Center of Gravity for Matrix Manufacturing

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

10.641

436

l

YlY;7.9

41

325

l

XlX

i

ii

c.g.

i

ii

c.g.

Computing the Center of Gravity for Matrix ManufacturingCoordinates Load

Location (X,Y) (li) lixi liyiCleveland (11,22) 15 165 330

Columbus (10,7) 10 165 70

Cincinnati (4,1) 12 165 12

Dayton (3,6) 4 165 24

Total 41 325 436

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Break-Even Analysis29

Break-even analysis computes the amount of goods requiredto 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 andvariable costs

Step 2: Plot the total costs for each location on one graph

Step 3: Identify ranges of output for which each locationhas the lowest total costStep 4: Solve algebraically for the break-even points

over the identified ranges


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Break-Even Analysis30

Remember the break even equations used for calculation totalcost of each location and for calculating the breakevenquantity Q.

Total cost = F + cQ Total revenue = pQ Break-even is where Total Revenue = Total Cost

Q = F/(p-c)Q = break-even quantity

p = price/unitc = variable cost/unitF = fixed cost


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Example using Break-even Analysis: Clean-ClothesCleaners is considering four possible sites for its new

operation. They expect to clean 10,000 garments. The tableand graph below are used for the analysis.

Example 9.6 Using Break-Even AnalysisLocation Fixed Cost Variable Cost Total Cost

A $350,000 $ 5(10,000) $400,000B $170,000 $25(10,000) $420,000C $100,000 $40(10,000) $500,000D $250,000 $20(10,000) $450,000

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The Transportation Method32

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 addingpotential location sites to the network of existingfacilities

Could also be used to evaluate adding multiple newsites 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 dependenton forecasts of demand (Ch 8).

Capacity is also affected by operations strategy (Ch 2), assize 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 aschoices on technology and automation (Ch 3).

C it Pl i d F ilit L ti


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Capacity Planning and Facility LocationAcross the Organization

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Capacity planning and location analysis affectoperations management and are important tomany others

Finance provides input to finalize capacity decisions

Marketing impacted by the organizational capacity andlocation to customers


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Chapter 9 Highlights35

Capacity planning is deciding on the maximumoutput rate of a facility

Location analysis is deciding on the best location fora facility

Capacity planning and location analysis decision areoften made simultaneously because the location ofthe facility is usually related to its capacity.


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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 evaluatingalternatives.

To choose between capacity planning alternatives

managers may use decision trees, which are amodeling tool for evaluating independent decisionsthat must be made in sequence.


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Key factors in location analysis included proximityto customers, transportation, source of labor,

community attitude, and proximity to supplies.Service and manufacturing firms focus on differentfactors. Profit-making and nonprofit organizationsalso focus on different factors.


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Several tools can be used to facilitate locationanalysis. Factor rating is a tool that helpsmanagers evaluate qualitative factors. The load-distance model and center of gravity approachevaluate the location decision based on distance.Break-even analysis is used to evaluate locationdecisions based on cost values. The transportation

method is an excellent tool for evaluating the costimpact of adding sites to the network of currentfacilities.

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