1 Facility Capacity and Location Chapter 5, Part A

1

Facility Capacity and LocationFacility Capacity and Location

Chapter 5, Part AChapter 5, Part AChapter 5, Part AChapter 5, Part A

2

OverviewOverviewOverviewOverview

Facility PlanningFacility Planning Long-Range Capacity PlanningLong-Range Capacity Planning Facility LocationFacility Location Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do

3

Facility PlanningFacility PlanningFacility PlanningFacility Planning

HOW MUCH long range capacity is neededHOW MUCH long range capacity is needed WHEN additional capacity is neededWHEN additional capacity is needed WHERE the production facilities should be locatedWHERE the production facilities should be located WHAT the layout and characteristics of the facilities WHAT the layout and characteristics of the facilities

should beshould be

4

Facility PlanningFacility PlanningFacility PlanningFacility Planning

The capital investment in land, buildings, technology, The capital investment in land, buildings, technology, and machinery is enormousand machinery is enormous

A firm must live with its facility planning decisions A firm must live with its facility planning decisions for a long time, and these decisions for a long time, and these decisions affectaffect:: Operating efficiencyOperating efficiency Economy of scaleEconomy of scale Ease of schedulingEase of scheduling Maintenance costsMaintenance costs … … Profitability!Profitability!

5

Long-RangeLong-RangeCapacity PlanningCapacity Planning

Long-RangeLong-RangeCapacity PlanningCapacity Planning

6

Steps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning Process

Estimate the capacity of the present facilities.Estimate the capacity of the present facilities. Forecast the long-range future capacity needs.Forecast the long-range future capacity needs. Identify and analyze sources of capacity to meet these Identify and analyze sources of capacity to meet these

needs.needs. Select from among the alternative sources of Select from among the alternative sources of

capacity.capacity.

7

Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity

In general, In general, production capacityproduction capacity is the maximum is the maximum production rate of an organization.production rate of an organization.

Capacity can be difficult to quantify due to …Capacity can be difficult to quantify due to … Day-to-day uncertainties such as employee Day-to-day uncertainties such as employee

absences, equipment breakdowns, and material-absences, equipment breakdowns, and material-delivery delaysdelivery delays

Products and services differ in production rates (so Products and services differ in production rates (so product mix is a factor)product mix is a factor)

Different interpretations of maximum capacityDifferent interpretations of maximum capacity

8

Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity

The Federal Reserve Board definesThe Federal Reserve Board defines sustainable sustainable practical capacitypractical capacity as the greatest level of output that a as the greatest level of output that a plant can maintain …plant can maintain … within the framework of a realistic work schedulewithin the framework of a realistic work schedule taking account of normal downtimetaking account of normal downtime assuming sufficient availability of inputs to assuming sufficient availability of inputs to

operate the machinery and equipment in placeoperate the machinery and equipment in place

9

Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

Output Rate CapacityOutput Rate Capacity For a facility having a single product or a few For a facility having a single product or a few

homogeneous products, the unit of measure is homogeneous products, the unit of measure is straightforward (barrels of beer per month)straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an For a facility having a diverse mix of products, an aggregate unit of capacityaggregate unit of capacity must be established must be established using a common unit of output (sales dollars per using a common unit of output (sales dollars per week)week)

10


Input Rate CapacityInput Rate Capacity Commonly used for service operations where Commonly used for service operations where

output measures are particularly difficultoutput measures are particularly difficult Hospitals use available beds per monthHospitals use available beds per month Airlines use available seat-miles per monthAirlines use available seat-miles per month Movie theatres use available seats per monthMovie theatres use available seats per month

11


Capacity Utilization PercentageCapacity Utilization Percentage Relates actual output to output capacityRelates actual output to output capacity

Example: Actual automobiles produced in a Example: Actual automobiles produced in a quarter divided by the quarterly automobile quarter divided by the quarterly automobile production capacityproduction capacity

Relates actual input used to input capacityRelates actual input used to input capacity Example: Actual accountant hours used in a Example: Actual accountant hours used in a

month divided by the monthly account-hours month divided by the monthly account-hours availableavailable

12


Capacity CushionCapacity Cushion an additional amount of capacity added onto the an additional amount of capacity added onto the

expected demand to allow for:expected demand to allow for: greater than expected demandgreater than expected demand demand during peak demand seasonsdemand during peak demand seasons lower production costslower production costs product and volume flexibilityproduct and volume flexibility improved quality of products and servicesimproved quality of products and services

13

Forecasting Capacity Demand Forecasting Capacity Demand Forecasting Capacity Demand Forecasting Capacity Demand

Forecast the firm’s demandForecast the firm’s demand Anticipate competitors’ actionsAnticipate competitors’ actions Anticipate technological developmentsAnticipate technological developments Understand product life cycle as it impacts capacityUnderstand product life cycle as it impacts capacity Consider the life of the facility (e.g. facility is 10-30 Consider the life of the facility (e.g. facility is 10-30

yr)yr)

14

Other ConsiderationsOther ConsiderationsOther ConsiderationsOther Considerations

Resource availabilityResource availability Accuracy of the long-range forecastAccuracy of the long-range forecast Capacity cushionCapacity cushion Changes in competitive environmentChanges in competitive environment

15

Expansion of Long-Term CapacityExpansion of Long-Term CapacityExpansion of Long-Term CapacityExpansion of Long-Term Capacity

Subcontract with other companiesSubcontract with other companies Acquire other companies, facilities, or resourcesAcquire other companies, facilities, or resources Develop sites, construct buildings, buy equipmentDevelop sites, construct buildings, buy equipment Expand, update, or modify existing facilitiesExpand, update, or modify existing facilities Reactivate standby facilitiesReactivate standby facilities

16

Reduction of Long-Term CapacityReduction of Long-Term CapacityReduction of Long-Term CapacityReduction of Long-Term Capacity

Sell off existing resources, lay off employeesSell off existing resources, lay off employees Mothball facilities, transfer employeesMothball facilities, transfer employees Develop and phase in new products/servicesDevelop and phase in new products/services

17

Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

Best operating levelBest operating level - least average unit cost - least average unit cost Economies of scaleEconomies of scale - average cost per unit decreases - average cost per unit decreases

as the volume increases toward the best operating as the volume increases toward the best operating levellevel

Diseconomies of scaleDiseconomies of scale - average cost per unit - average cost per unit increases as the volume increases beyond the best increases as the volume increases beyond the best operating leveloperating level

18

Economies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of Scale

Average UnitAverage UnitCost of Output ($)Cost of Output ($)

Annual Volume (units)Annual Volume (units)

Best Operating LevelBest Operating Level

EconomiesEconomiesof Scaleof Scale

DiseconomiesDiseconomiesof Scaleof Scale

19

Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

Declining costs result from:Declining costs result from: Fixed costs being spread over more and more unitsFixed costs being spread over more and more units Longer production runs result in a smaller Longer production runs result in a smaller

proportion of labor being allocated to setupsproportion of labor being allocated to setups Proportionally less material scrapProportionally less material scrap … … and other economiesand other economies

20

Diseconomies of ScaleDiseconomies of ScaleDiseconomies of ScaleDiseconomies of Scale

Increasing costs result from increased congestion of Increasing costs result from increased congestion of workers and material, which contributes to:workers and material, which contributes to: Increasing inefficiencyIncreasing inefficiency Difficulty in schedulingDifficulty in scheduling Damaged goodsDamaged goods Reduced moraleReduced morale Increased use of overtimeIncreased use of overtime … … and other diseconomiesand other diseconomies

21

Two General Approaches Two General Approaches to Expanding Long-Range Capacityto Expanding Long-Range Capacity


All at OnceAll at Once – build the ultimate facility now and – build the ultimate facility now and grow into itgrow into it

IncrementallyIncrementally – build incrementally as capacity – build incrementally as capacity demand growsdemand grows

22



All at OnceAll at Once Little risk of having to turn down business due to Little risk of having to turn down business due to

inadequate capacityinadequate capacity Less interruption of productionLess interruption of production One large construction project costs less than One large construction project costs less than

several smaller projectsseveral smaller projects Due to inflation, construction costs will be higher Due to inflation, construction costs will be higher

in the futurein the future Most appropriate for mature products with stable Most appropriate for mature products with stable

demanddemand

23



IncrementallyIncrementally Less risky if forecast needs do not materializeLess risky if forecast needs do not materialize Funds that could be used for other types of Funds that could be used for other types of

investments will not be tied up in excess capacityinvestments will not be tied up in excess capacity More appropriate for new productsMore appropriate for new products

24

Subcontractor NetworksSubcontractor NetworksSubcontractor NetworksSubcontractor Networks

A viable alternative to larger-capacity facilities is to A viable alternative to larger-capacity facilities is to develop subcontractor and supplier networks.develop subcontractor and supplier networks. ““Farming out” or outsourcing your capacity needs Farming out” or outsourcing your capacity needs

to your suppliersto your suppliers Developing long-range relationships with suppliers Developing long-range relationships with suppliers

of parts, components, and subassembliesof parts, components, and subassemblies Requiring less capital for production facilitiesRequiring less capital for production facilities More easily varying capacity during slack or peak More easily varying capacity during slack or peak

demand periodsdemand periods

25

Outsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service Functions

Building maintenanceBuilding maintenance Data processingData processing DeliveryDelivery PayrollPayroll BookkeepingBookkeeping Customer serviceCustomer service MailroomMailroom Benefits administrationBenefits administration … … and moreand more

26

Economies of ScopeEconomies of ScopeEconomies of ScopeEconomies of Scope

The ability to produce many product models in one The ability to produce many product models in one flexible facility more cheaply than in separate flexible facility more cheaply than in separate facilitiesfacilities

Highly flexible and programmable automation allows Highly flexible and programmable automation allows quick, inexpensive product-to-product changesquick, inexpensive product-to-product changes

Economies are created by spreading the automation Economies are created by spreading the automation cost over many productscost over many products

27

Analyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning Decisions

Break-Even Analysis (Chapter 4 and this chapter)Break-Even Analysis (Chapter 4 and this chapter) Present-Value AnalysisPresent-Value Analysis Computer Simulation (Chapter 9)Computer Simulation (Chapter 9) Waiting Line Analysis (Chapter 9)Waiting Line Analysis (Chapter 9) Linear Programming (Chapter 8)Linear Programming (Chapter 8) Decision Tree Analysis (this chapter)Decision Tree Analysis (this chapter)

28

Decision Tree AnalysisDecision Tree AnalysisDecision Tree AnalysisDecision Tree Analysis

Structures complex multiphase decisions, showing:Structures complex multiphase decisions, showing: What decisions must be madeWhat decisions must be made What sequence the decisions must occurWhat sequence the decisions must occur Interdependence of the decisionsInterdependence of the decisions

Allows objective evaluation of alternativesAllows objective evaluation of alternatives Incorporates uncertaintyIncorporates uncertainty Develops expected valuesDevelops expected values

29

Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café

Decision Tree AnalysisDecision Tree Analysis

Good Eats Café is about to build a new Good Eats Café is about to build a new restaurant. An architect has developed three building restaurant. An architect has developed three building designs, each with a different seating capacity. Good designs, each with a different seating capacity. Good Eats estimates that the average number of customers Eats estimates that the average number of customers per hour will be 80, 100, or 120 with respective per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff table probabilities of 0.4, 0.2, and 0.4. The payoff table showing the profits for the three designs is on the showing the profits for the three designs is on the next slide. next slide.

30

Payoff TablePayoff Table

Average Number of Customers Per HourAverage Number of Customers Per Hour

cc11 = 80 = 80 cc22 = 100 = 100 cc33 = 120 = 120

Design A $10,000 $15,000 $14,000Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000Design C $ 6,000 $16,000 $21,000

Payoff TablePayoff Table

Average Number of Customers Per HourAverage Number of Customers Per Hour

cc11 = 80 = 80 cc22 = 100 = 100 cc33 = 120 = 120

Design A $10,000 $15,000 $14,000Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000Design C $ 6,000 $16,000 $21,000


31

Expected Value ApproachExpected Value ApproachCalculate the expected value for each decision. Calculate the expected value for each decision.

The decision tree on the next slide can assist in this The decision tree on the next slide can assist in this calculation. Here calculation. Here dd11, , dd22, , dd33 represent the decision represent the decision

alternatives of designs A, B, C, and alternatives of designs A, B, C, and cc11, , cc22, , cc33 represent represent

the different average customer volumes (80, 100, and the different average customer volumes (80, 100, and 120) that might occur.120) that might occur.

Expected Value ApproachExpected Value ApproachCalculate the expected value for each decision. Calculate the expected value for each decision.

The decision tree on the next slide can assist in this The decision tree on the next slide can assist in this calculation. Here calculation. Here dd11, , dd22, , dd33 represent the decision represent the decision

alternatives of designs A, B, C, and alternatives of designs A, B, C, and cc11, , cc22, , cc33 represent represent

the different average customer volumes (80, 100, and the different average customer volumes (80, 100, and 120) that might occur.120) that might occur.


32

Decision TreeDecision Tree

1111

(.2)(.2)

(.4)(.4)

(.4)(.4)

(.4)(.4)

(.2)(.2)

(.4)(.4)

(.4)(.4)

(.2)(.2)

(.4)(.4)

dd11

dd22

dd33

cc11

cc11

cc11

cc22

cc33

cc22

cc22

cc33

cc33

PayoffsPayoffs

10,00010,000

15,00015,000

14,00014,000

8,0008,000

18,00018,000

12,00012,000

6,0006,000

16,00016,000

21,00021,000

2222

3333

4444


33

Expected Value For Each DecisionExpected Value For Each Decision

Choose the design with largest EV -- Design C.Choose the design with largest EV -- Design C.

3333

4444

dd11

dd22

dd33

EV = .4(10,000) + .2(15,000) + .4(14,000)EV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600= $12,600

EV = .4(8,000) + .2(18,000) + .4(12,000)EV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600= $11,600

EV = .4(6,000) + .2(16,000) + .4(21,000)EV = .4(6,000) + .2(16,000) + .4(21,000) = $14,000= $14,000

Design ADesign A

Design BDesign B

Design CDesign C

2222

1 1 1 1


34

Facility Location

35

A Sequence of DecisionsA Sequence of DecisionsA Sequence of DecisionsA Sequence of Decisions

National DecisionNational DecisionNational DecisionNational Decision

Regional DecisionRegional DecisionRegional DecisionRegional Decision

Community DecisionCommunity DecisionCommunity DecisionCommunity Decision

Site DecisionSite DecisionSite DecisionSite Decision

Political, social, economic stability;Currency exchange rates; . . . . .

Climate; Customer concentrations;Degree of unionization; . . . . .

Transportation system availability;Preference of management; . . . . .

Site size/cost; Environmental impact; Zoning restrictions; . . . . .

36

Factors Affecting Factors Affecting the Location Decisionthe Location Decision


EconomicEconomic Site acquisition, preparation and construction costsSite acquisition, preparation and construction costs Labor costs, skills and availabilityLabor costs, skills and availability Utilities costs and availabilityUtilities costs and availability Transportation costsTransportation costs TaxesTaxes

37



Non-economicNon-economic Labor attitudes and traditionsLabor attitudes and traditions Training and employment servicesTraining and employment services Community’s attitudeCommunity’s attitude Schools and churchesSchools and churches Recreation and cultural attractionsRecreation and cultural attractions Amount and type of housing availableAmount and type of housing available

38

Facility Types and TheirFacility Types and TheirDominant Locational FactorsDominant Locational Factors


Mining, Quarrying, and Heavy ManufacturingMining, Quarrying, and Heavy Manufacturing Near their raw material sourcesNear their raw material sources Abundant supply of utilitiesAbundant supply of utilities Land and construction costs are inexpensiveLand and construction costs are inexpensive

Light ManufacturingLight Manufacturing Availability and cost of laborAvailability and cost of labor

WarehousingWarehousing Proximity to transportation facilitiesProximity to transportation facilities Incoming and outgoing transportation costsIncoming and outgoing transportation costs

. . . more. . . more

39



R&D and High-Tech ManufacturingR&D and High-Tech Manufacturing Ability to recruit/retain scientists, engineers, etc.Ability to recruit/retain scientists, engineers, etc. Near companies with similar technology interestsNear companies with similar technology interests

Retailing and For-Profit ServicesRetailing and For-Profit Services Near concentrations of target customersNear concentrations of target customers

Government and Health/Emergency ServicesGovernment and Health/Emergency Services Near concentrations of constituentsNear concentrations of constituents

40

Some Reasons the Some Reasons the Facility Location Decision ArisesFacility Location Decision Arises


Changes in the marketChanges in the market ExpansionExpansion ContractionContraction Geographic shiftGeographic shift

Changes in inputsChanges in inputs Labor skills and/or costsLabor skills and/or costs Materials costs and/or availabilityMaterials costs and/or availability Utility costsUtility costs

. . . more. . . more

41



Changes in the environmentChanges in the environment Regulations and lawsRegulations and laws Attitude of the communityAttitude of the community

Changes in technologyChanges in technology

42

Analyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility Locations

Factors that tend to dominate the industrial-facility Factors that tend to dominate the industrial-facility location decision are:location decision are:

Transportation costsTransportation costs Labor cost and availabilityLabor cost and availability Materials cost and availabilityMaterials cost and availability Utilities costUtilities cost

43

Qualitative Factors in Location DecisionsQualitative Factors in Location DecisionsQualitative Factors in Location DecisionsQualitative Factors in Location Decisions

Often-important qualitative factors includeOften-important qualitative factors include HousingHousing ClimateClimate Community activitiesCommunity activities Education and health servicesEducation and health services RecreationRecreation ChurchesChurches Union activitiesUnion activities Community attitudesCommunity attitudes

44

Integrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative Factors

Managers often wrestle with the task of trading off Managers often wrestle with the task of trading off qualitative factors against quantitative onesqualitative factors against quantitative ones

Methods for systematically displaying the relative Methods for systematically displaying the relative advantages and disadvantages, both qualitative and advantages and disadvantages, both qualitative and quantitative, of each location alternative have been quantitative, of each location alternative have been developeddeveloped

The The relative-aggregate-scoresrelative-aggregate-scores approach is one such approach is one such methodmethod

45

Relative-Aggregate-Scores ApproachRelative-Aggregate-Scores ApproachRelative-Aggregate-Scores ApproachRelative-Aggregate-Scores Approach

Quantitative and Qualitative FactorsQuantitative and Qualitative Factors

Location ALocation A Location BLocation B

Econ. Wgt. Econ.Econ. Wgt. Econ. Wgt. Wgt.

FactorFactor Weight Data Score Score Data Score Score Weight Data Score Score Data Score Score

Prod.cost/tonProd.cost/ton .45.45 $65$65 .923.923 .415.415 $60$60 1.0001.000 .450.450

Transp.cost/tonTransp.cost/ton .35.35 $18$18 1.0001.000 .350.350 $21$21 .857.857 .300.300

Labor Avail.Labor Avail. .15.15 .700.700 .105.105 .500.500 .075.075

Union ActivityUnion Activity .05.05 .450.450 .023.023 .750.750 .038.038

Total ScoreTotal Score .893.893 .863.863

46

End of Chapter 5, Part AEnd of Chapter 5, Part A

Documents

1 Facility Capacity and Location Chapter 5, Part A