1. F O U R T H E D I T I O N Facility Decisions: Location and Capacity © The McGraw-Hill Companies, Inc., 2003 chapter 7 DAVIS AQUILANO CHASE PowerPoint Presentation by Charlie Cook

2. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–2 Chapter Objectives Present a framework for evaluating alternative site locations. Identify the various factors, both quantitative and qualitative, that should be taken into consideration when selecting a location for a manufacturing or service organization. Distinguish between those factors that are important for locating a manufacturing facility and those that are important for locating a service operation. Introduce the concept of geographic information systems (GIS) as a tools for evaluating locations.

3. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–3 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.

4. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–4 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

5. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–5 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

6. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–6 Comparison of 1995 Hourly Wages for Manufacturing Workers Exhibit 7.1 Source: Bureau of Labor Statistics, September 7, 2000.

7. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–7 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.

8. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–8 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).

9. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–9 Customer Requirements and Location Strategies for Service Organizations Exhibit 7.2 Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35.

10. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–10 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.

11. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–11 Distribution of a Bank’s Housing Loans in an Area Exhibit 7.3a Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

12. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–12 Distribution of Sales for Regional Mall by Area Exhibit 7.3b Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

13. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–13 Demand for Health Care in a Region and the Services That Are Available Exhibit 7.3c Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

14. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–14 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.

15. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–15 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.

16. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–16 Factor-Rating System Example The Low-Credit Card Interest Bank

17. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–17 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

18. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–18 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

19. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–19 Grid Map of Ye Old Bake Shoppe’s Retail Locations Exhibit 7.4

20. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–20 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

21. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–21 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

22. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–22 Important Capacity Concepts 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.

23. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–23 Comparing Capacity and Demand in a Service Operation Exhibit 7.5 Source: Adapted from Christopher Lovelock, “Strategies for Managing Capacity-Constrained Services,” Managing Services: Marketing, Operations Management and Human Resources, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1992).

24. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–24 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.

25. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–25 Economies of Scale Exhibit 7.6

26. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–26 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

27. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–27 Strategies for Adding Capacity: Proactive Strategy Exhibit 7.7a

28. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–28 Strategies for Adding Capacity: Neutral Strategy Exhibit 7.7b

29. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–29 Strategies for Adding Capacity: Reactive Strategy Exhibit 7.7c Time

30. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–30 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.

31. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–31 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.

32. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–32 Plant Location Matrix Exhibit 7.8

33. Fundamentals of Operations Management 4e© The McGraw-Hill Companies, Inc., 20037–33 Quantity of Compressors Required at Each Plant Exhibit 7.9