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F O U R T H E D I T I O N
© The McGraw-Hill Companies, Inc., 2003
DAVIS
AQUILANO
CHASE
PowerPointPresentation
byCharlieCook
Facility Decisions:Location and Capacity
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
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 7–7
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 7–8
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 7–9
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 7–10
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 7–11
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 7–12
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 7–13
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 7–14
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 7–15
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 7–16
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 7–17
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 7–18
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 7–19
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 7–20
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 7–21
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 7–22
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 7–23
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 7–24
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 7–25
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 7–26
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 7–27
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 7–28
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 7–29
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 7–30
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 7–31
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 7–32
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