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

PowerPointPresentation

byCharlieCook

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–2

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–3

Managerial IssuesManagerial IssuesManagerial IssuesManagerial 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–4

Locating Manufacturing FacilitiesLocating Manufacturing FacilitiesLocating Manufacturing FacilitiesLocating 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–5

Qualitative Location FactorsQualitative Location FactorsQualitative Location FactorsQualitative 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–6

Comparison of 1995 Hourly Wages Comparison of 1995 Hourly Wages for Manufacturing Workersfor Manufacturing Workers

Comparison of 1995 Hourly Wages Comparison of 1995 Hourly Wages for Manufacturing Workersfor Manufacturing Workers

Exhibit 7.1Exhibit 7.1Source: Bureau of Labor Statistics, September 7, 2000.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–7

Quantitative Location FactorsQuantitative Location FactorsQuantitative Location FactorsQuantitative 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–8

Quantitative Location FactorsQuantitative Location FactorsQuantitative Location FactorsQuantitative 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).

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–9

Customer Requirements and Location Customer Requirements and Location Strategies for Service Organizations Strategies for Service Organizations

Customer Requirements and Location Customer Requirements and Location Strategies for Service Organizations Strategies for Service Organizations

Exhibit 7.2Exhibit 7.2Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–10

Computer Programs for Site Computer Programs for Site SelectionSelection

Computer Programs for Site Computer Programs for Site SelectionSelection

• 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–11

Distribution of a Bank’s Housing Loans Distribution of a Bank’s Housing Loans in an Areain an Area

Distribution of a Bank’s Housing Loans Distribution of a Bank’s Housing Loans in an Areain an Area

Exhibit 7.3aExhibit 7.3aSource: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–12

Distribution of Sales for Regional Mall by Distribution of Sales for Regional Mall by AreaArea

Distribution of Sales for Regional Mall by Distribution of Sales for Regional Mall by AreaArea

Exhibit 7.3bExhibit 7.3bSource: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–13

Demand for Health Care in a Region and Demand for Health Care in a Region and the Services That Are Availablethe Services That Are Available

Demand for Health Care in a Region and Demand for Health Care in a Region and the Services That Are Availablethe Services That Are Available

Exhibit 7.3cExhibit 7.3cSource: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–14

Types of Service FacilitiesTypes of Service FacilitiesTypes of Service FacilitiesTypes 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–15

Evaluating Potential LocationsEvaluating Potential LocationsEvaluating Potential LocationsEvaluating Potential Locations

• Factor Rating System1. 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–16

Factor-Rating System ExampleFactor-Rating System ExampleFactor-Rating System ExampleFactor-Rating System Example

• The Low-Credit Card Interest Bank

Factor Weight Rating Site A

Rating Site B

Score Site A

Score Site B

Size and education of workforce within 15 miles 20 60 75 1,200 1,500

Availability of part-time workers (students) 10 45 20 450 200

Distance to telecommunication infrastructure 25 80 90 2,000 2,250

Distance to higher education facilities 5 50 35 250 175

Cost of living index 15 85 80 1,275 1,200

Cultural amenities 10 65 40 650 400

Crime statistics 15 95 90 1,425 1,350

Totals 100 7,250 7,075

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–17

Evaluating Potential LocationsEvaluating Potential LocationsEvaluating Potential LocationsEvaluating 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–18

Center of Gravity FormulasCenter of Gravity FormulasCenter of Gravity FormulasCenter of Gravity Formulas

Cx = X coordinate of the center of gravity

Cy = Y coordinate of the center of gravity

dix = X coordinate of the ith location

diy = Y coordinate of the ith location

Vi = Volume of goods transported to the ith location

VVdi

iixxC

V

Vd

i

iiyyC

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–19

Grid Map of Ye Old Bake Shoppe’sGrid Map of Ye Old Bake Shoppe’sRetail LocationsRetail Locations

Grid Map of Ye Old Bake Shoppe’sGrid Map of Ye Old Bake Shoppe’sRetail LocationsRetail Locations

Exhibit 7.4Exhibit 7.4

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–20

Factors Affecting Capacity DecisionsFactors Affecting Capacity DecisionsFactors Affecting Capacity DecisionsFactors 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–21

Capacity DecisionsCapacity DecisionsCapacity DecisionsCapacity 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–22

Important Capacity ConceptsImportant Capacity ConceptsImportant Capacity ConceptsImportant 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–23

Comparing Capacity and DemandComparing Capacity and Demandin a Service Operationin a Service Operation

Comparing Capacity and DemandComparing Capacity and Demandin a Service Operationin a Service Operation

Exhibit 7.5Exhibit 7.5Source: 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).

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–24

Important Capacity ConceptsImportant Capacity ConceptsImportant Capacity ConceptsImportant 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–25

Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

Exhibit 7.6Exhibit 7.6

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–26

Important Capacity ConceptsImportant Capacity ConceptsImportant Capacity ConceptsImportant 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

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–27

Strategies for Adding Capacity:Strategies for Adding Capacity:Proactive StrategyProactive Strategy

Strategies for Adding Capacity:Strategies for Adding Capacity:Proactive StrategyProactive Strategy

Exhibit 7.7aExhibit 7.7a

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–28

Strategies for Adding Capacity:Strategies for Adding Capacity:Neutral StrategyNeutral Strategy

Strategies for Adding Capacity:Strategies for Adding Capacity:Neutral StrategyNeutral Strategy

Exhibit 7.7bExhibit 7.7b

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–29

Strategies for Adding Capacity:Strategies for Adding Capacity:Reactive StrategyReactive Strategy

Strategies for Adding Capacity:Strategies for Adding Capacity:Reactive StrategyReactive Strategy

Exhibit 7.7cExhibit 7.7c

TimeTime

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–30

Capacity PlanningCapacity PlanningCapacity PlanningCapacity Planning

• 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–31

Capacity MeasuresCapacity MeasuresCapacity MeasuresCapacity 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.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–32

Plant Location MatrixPlant Location MatrixPlant Location MatrixPlant Location Matrix

Exhibit 7.8Exhibit 7.8

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 7–33

Quantity of Compressors Required Quantity of Compressors Required at Each Plantat Each Plant

Quantity of Compressors Required Quantity of Compressors Required at Each Plantat Each Plant

Exhibit 7.9Exhibit 7.9