1. Reid & Sanders, Operations Management © Wiley 2002 Capacity Planning and Facility Location 9 C H A P T E R

2. Reid & Sanders, Operations Management © Wiley 2002 Page 2 Learning Objectives Define & explain capacity planning Define & explain location analysis Describe the relationship between capacity planning & location analysis Describe decision support tools for capacity planning & location analysis

3. Reid & Sanders, Operations Management © Wiley 2002 Page 3 Capacity Planning Capacity is the maximum output rate of a production or service facility Capacity planning is the process of establishing the available capacity: –Strategic issues: capital expenditures in facility & equipment –Tactical issues: workforce & inventory levels, & day-to-day use of equipment

4. Reid & Sanders, Operations Management © Wiley 2002 Page 4 Measuring Capacity

5. Reid & Sanders, Operations Management © Wiley 2002 Page 5 Available Capacity Design capacity: –Maximum output rate under ideal conditions Effective capacity: –Maximum output rate under normal (realistic) conditions

6. Reid & Sanders, Operations Management © Wiley 2002 Page 6 Capacity Utilization Measures how much of the available capacity is actually being used: –Measures effectiveness –Use either effective or design capacity in denominator

7. Reid & Sanders, Operations Management © Wiley 2002 Page 7 How Much Capacity? 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 too much work-in-process)

8. Reid & Sanders, Operations Management © Wiley 2002 Page 8 Best Operating Level

9. Reid & Sanders, Operations Management © Wiley 2002 Page 9 Choose Capacity by Matching Forecast & Best Operating Level

10. Reid & Sanders, Operations Management © Wiley 2002 Page 10 Other Issues Focused factories: –Small, specialized facilities with limited objectives Plant within a plant (PWP): –Segmenting larger operations into smaller operating units with focused objectives Subcontractor networks: –Outsource non-core items to free up capacity for what you do well Capacity cushions: –Plan to underutilize capacity to provide flexibility

11. Reid & Sanders, Operations Management © Wiley 2002 Page 11 Evaluating Alternatives Decision trees: –A modeling tool for evaluating sequential decisions –Identify the alternatives at each point in time (decision points), estimate probable consequences of each decision (chance events) & the ultimate outcomes (e.g.: profit or loss)

12. Reid & Sanders, Operations Management © Wiley 2002 Page 12 Decision Trees Build from the present to the future: –Distinguish between decisions (under your control) & chance events (out of your control, but can be estimated to a given probability) Solve from the future to the present: –Generate an expected value for each decision point based on probable outcomes of subsequent events

13. Reid & Sanders, Operations Management © Wiley 2002 Page 13 Example

14. Reid & Sanders, Operations Management © Wiley 2002 Page 14 Interpretation At decision point 2, choose to expand to maximize profits ($200,000 > $150,000) Calculate expected value of small expansion: –EV small = 0.30($80,000) + 0.70($200,000) = $164,000 Calculate expected value of large expansion: –EV large = 0.30($50,000) + 0.70($300,000) = $225,000 At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit: –$225,000 > $164,000 Choose large expansion despite the fact that there is a 30% chance it’s the worst decision: –Take the calculated risk!

15. Reid & Sanders, Operations Management © Wiley 2002 Page 15 Facility Location 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

16. Reid & Sanders, Operations Management © Wiley 2002 Page 16 Factors to Consider Proximity to suppliers: –Reduce transportation costs of perishable or bulky raw materials Proximity to customers: –E.g.: high population areas, close to JIT partners Proximity to labor: –Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)

17. Reid & Sanders, Operations Management © Wiley 2002 Page 17 More Factors Community considerations: –Local community’s attitude toward the facility (e.g.: 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.

18. Reid & Sanders, Operations Management © Wiley 2002 Page 18 Globalization 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 Other issues: –Language barriers, different laws & regulations, different business cultures

19. Reid & Sanders, Operations Management © Wiley 2002 Page 19 Decision Support Tools Factor rating method Load-distance model Center of gravity approach Break-even analysis Transportation method

20. Reid & Sanders, Operations Management © Wiley 2002 Page 20 Factor Rating Method

21. Reid & Sanders, Operations Management © Wiley 2002 Page 21 Load Distance Model Calculate the rectilinear distance: Multiply by the number of loads

22. Reid & Sanders, Operations Management © Wiley 2002 Page 22 The End Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.