OPERATIONS MANAGEMENT INTEGRATING MANUFACTURING AND SERVICES FIFTH EDITION Mark M. Davis Janelle Heineke Copyright ©2005, The McGraw-Hill Companies, Inc. PowerPoint Presentation by Charlie Cook, The University of West Alabama

CHAPTER PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2005 The McGraw-Hill Companies. All rights reserved. Facility Location and Capacity 11

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–3 CHAPTER OBJECTIVES Present a framework for evaluating alternative site locations. Identify the quantitative and qualitative factors that should be considered when selecting a location for a manufacturing or service organization. Distinguish between factors that are important for locating a manufacturing facility and those that are important for locating a service operation. Introduce geographic information systems (GIS) as a tool for evaluating locations.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–4 Managerial Issues Deciding how large, when, where and what processes to include in the construction of a facility. Understanding the different risks associated with back-of- the-house and front-of-the-house investments as they relate to customer demographics and characteristics of a given location for product manufacturing and service producing firms. Factoring the complications of globalization into location decision.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–5 Locating Manufacturing Facilities Products that decrease in weight and volume during manufacturing tend to be located near the sources of raw materials. Products that increase in weight and volume during manufacturing tend to be located near the consumers. One site cost disadvantage such as transportation may be offset by a cost savings advantage specific to the site such as low labor costs. A location analysis should consider both qualitative and quantitative factors

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–6 Qualitative Location Factors Local Infrastructure –Institutional (e.g., reliable electrical power grid) –Transportational (e.g., railway systems) Worker Education and Skills –Education and skills of local workers. Product Content Requirements –The minimum percentage of product that must be produced in a country in order for the product to be sold in that country. Political/Economic Stability

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–7 Quantitative Location Factors Labor Costs –Labor costs vary dramatically, depending on location. Cheap labor often lacks needed education and skills. Distribution Costs –Distance and the time required to deliver products can offset lower location costs. Facility Costs –Special economic zones (SEZ) Duty-free areas established to attract foreign investment in the form of manufacturing facilities.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–8 Comparison of 2002 Hourly Wages for Manufacturing Workers Exhibit 11.1 Source: Bureau of Labor Statistics Report “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, 1975–2002,” Table 2, September 26, 2003.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–9 Quantitative Location Factors Exchange Rates –Variations in rates can have a significant effect on sales and profits. Tax Rates –Taxes vary considerably between countries and within countries. –All forms of taxes should be considered (property, payroll, inventory, and investment taxes).

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–10 Customer Requirements and Location Strategies for Service Operations Exhibit 11.2 Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35. Courtesy GeoTec Media,

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–11 Computer Programs for Site Selection Geographic Information Systems (GIS) –Computer tool that assesses alternative locations for service operations. –Provides a “bird’s eye view” of a particular region of interest.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–12 Exhibit 11.3 A.Distribution of a Bank’s Housing Loans in an Area B.Distribution of Sales for a Regional Mall by Area C.Demand for Health care in a Region and the Services That Are Available Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997). Reprinted with permission.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–13 Types of Service Facilities Facilities with a Direct Interface with the Customer –Brick and mortar facilities (front-of-the-house) that require the customer to be present. Facilities with Indirect Customer Contact –Services that link only indirectly with the customer who is not required to be present. Facilities with No Customer Contact –Back-of-the-house operations that are involved with the processing and distribution of goods.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–14 Methods for Evaluating Potential Locations Factor Rating System 1.Identify the specific criteria or factors to be considered. 2.Assign a weight to each factor. 3.Select a common scale for rating each factor. 4.Rate each potential location on each of the factors. 5.Multiply each factor’s score by its weight. 6.Sum the weighted scores and select the location with the highest score.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–15 Factor-Rating System Example The Low-Credit Card Interest Bank

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–16 Evaluation of Potential Locations Macro-analysis –The evaluation of alternative regions, subregions, and communities. Micro-analysis –Evaluation of specific sites in a selected community. Center-of-gravity method

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–17 Evaluating Potential Locations Center-of-Gravity Method –Used to determine the optimal location of a facility based on minimizing the transportation costs between where the goods are produced and where they are sold or redistributed. –Locate each existing operation on an X and Y coordinate grid map. –Calculate X coordinate of center of gravity. –Calculate Y coordinate of center of gravity.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–18 Grid Map of Ye Olde Bake Shoppe’s Retail Locations Exhibit 11.4

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–19 Center of Gravity Formulas C x =X coordinate of the center of gravity C y =Y coordinate of the center of gravity d ix =X coordinate of the ith location d iy =Y coordinate of the ith location V i =Volume of goods transported to the ith location

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–20 Center of Gravity: Ye Olde Bake Shoppe’s Central Commissary.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–21 Spreadsheet Approach to Locating Facilities

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–22 Factors Affecting Capacity Decisions External Factors –Government regulations –Union agreements –Supplier capabilities Internal –Product and service design –Personnel and jobs –Plant layout and process flow –Equipment capabilities and maintenance –Materials management –Quality control systems –Management capabilities

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–23 Capacity Decisions Production System Capacity Affects: –Response rate to market changes –Overall product cost structure –Composition of the workforce –Level of production technology utilized –Extent of management and staff support –General inventory strategy

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–24 Capacity Utilization and Service Level Balancing Capacity and Demand –Demand exceeds capacity, customers are turned away. –Demand exceeds optimum capacity, customers receive poor service. –Demand equals optimum capacity, customers are service properly. –Demand is less than optimum capacity, there is idle capacity. Too much capacity—costs rise. Too little capacity—customers are lost.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–25 Comparing Capacity and Demand for a Food Service Facility Exhibit 11.5 Source: Managing Services, 2nd ed. by Christopher Lovelock, © Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–26 Important Capacity Concepts Best Operating Level –The capacity (production volume) for which the average unit cost of output is at a minimum. Economies of Scales –The output range in which average units costs decrease as unit production volumes increase. Diseconomies of Scale –The output range in which average unit costs rise due to added costs incurred at operating levels exceeding the best operating level.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–27 Economies of Scale Exhibit 11.6

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–28 Important Capacity Concepts Capacity Flexibility –Ability to provide a wider range of products and volumes with short lead times. Flexible plants Flexible processes Flexible workers Use of External Capacity Subcontracting Sharing capacity Agile Manufacturing –The capability of a manufacturing process to respond quickly to marketplace changes. Capacity Balance –Balanced internal operational capacities

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–29 Capacity Strategies Proactive –Anticipating future growth and building a facility so that it is up and running when the demand is there. Neutral –Additional capacity becomes available when demandis about 50 percent of planned added capacity. The issue is how best to satisfy demand before the plant is up and operating. Reactive –plant capacity is not added until all of the planned output from the facility can be sold.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–30 Strategies for Adding Capacity: Proactive Strategy Exhibit 11.7A

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–31 Strategies for Adding Capacity: Neutral Strategy Exhibit 11.7B

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–32 Strategies for Adding Capacity: Reactive Strategy Exhibit 11.7C

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–33 Capacity Planning –Determining which level of capacity to operate at to meet customer demand in a cost efficient manner. 1.Forecast sales for each product line. 2.Forecast sales for individual products within each line. 3.Calculate labor and equipment requirements to meet product line forecasts. 4.Project labor and equipment availabilities over the planning horizon.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–34 Capacity Measures Capacity –The output of a process or facility over a given time period. Capacity Utilization –The percentage of the available capacity that is actually being used.