8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 1/47
1
Facility CapacityFacility Capacity
MODULEMODULE--55MODULEMODULE--55
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 2/47
2
OverviewOverviewOverviewOverview
FacilityFacility PlanningPlanning
Facility LocationFacility Location
LongLong--RangeRange Capacity PlanningCapacity Planning
Facility LayoutFacility Layout
WrapWrap--Up: What WorldUp: What World--ClassClass
Companies DoCompanies Do
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 3/47
3
Facility PlanningFacility PlanningFacility PlanningFacility Planning
HOW MUCH long range capacity isHOW MUCH long range capacity is
needed?needed?
WHEN additional capacity isWHEN additional capacity is needed?needed? WHER E the production facilitiesWHER E the production facilities
should beshould be located?located?
WHAT the layout and characteristicsWHAT the layout and characteristics
of the facilities shouldof the facilities should be? be?
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 4/47
4
Facility PlanningFacility PlanningFacility PlanningFacility Planning The capital investment in land, buildings,The capital investment in land, buildings,
technology, and machinery is enormoustechnology, and machinery is enormous
A firm must live with its facility planningA firm must live with its facility planning
decisions for a long time, and these decisionsdecisions for a long time, and these decisionsaffect:affect:
O perating efficiencyO perating efficiency
Economy of scaleEconomy of scale
Ease of schedulingEase of scheduling
Maintenance costsMaintenance costs
« Profitability!« Profitability!
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 5/47
5
LongLong--RangeRangeCapacity PlanningCapacity Planning
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 6/47
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 presentEstimate the capacity of the present
facilities.facilities.
Forecast the longForecast the long--range future capacityrange future capacity
needs.needs.
Identify and analyze sources of capacityIdentify and analyze sources of capacity
to meet these needs.to meet these needs. Select from among the alternative sourcesSelect from among the alternative sources
of capacity.of capacity.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 7/47
7
Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity
In general,In general, production capacityproduction capacity is theis themaximum production rate of an organization.maximum production rate of an organization.
CapacityCapacity can be difficult to quantify due to «can be difficult to quantify due to «
DayDay--toto--day uncertainties such as employeeday uncertainties such as employeeabsences, equipment breakdowns, andabsences, equipment breakdowns, and
materialmaterial--delivery delaysdelivery delays
Products and services differ in productionProducts and services differ in productionrates (so product mix is a factor)rates (so product mix is a factor)
Different interpretations of maximumDifferent interpretations of maximum
capacitycapacity
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 8/47
8
Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity
A facility¶s maximum productive capability,A facility¶s maximum productive capability,usually expressed as volume of output per usually expressed as volume of output per
period of time. It is also called period of time. It is also called designdesign
capacitycapacity.. The capacity of a facility is defined as theThe capacity of a facility is defined as the
maximum load that can be handled by it duringmaximum load that can be handled by it during
a given period.a given period.
The load can be expressed as amounts of inputThe load can be expressed as amounts of input
or output e.g. ³Tons of steel produced per year´or output e.g. ³Tons of steel produced per year´
or ³Amount of plastic processed per year´.or ³Amount of plastic processed per year´.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 9/47
9
Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity
TheThe CentralCentral Reserve Board definesReserve Board defines sustainablesustainablepractical capacitypractical capacity or or effective capacityeffective capacity asas
the greatest level of output that a plant canthe greatest level of output that a plant can
maintain «maintain « within the framework of a realistic work within the framework of a realistic work
scheduleschedule
taking account of normal downtimetaking account of normal downtime
assuming sufficient availability of inputs toassuming sufficient availability of inputs to
operate the machinery and equipment in placeoperate the machinery and equipment in place
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 10/47
10
Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity
TheThe actual capacityactual capacity is equal or is equal or
lower than the effective capacity. Itlower than the effective capacity. It
is maximum output rate achievedis maximum output rate achievedunder constraints of machineunder constraints of machine
breakdown, labor inefficiency / breakdown, labor inefficiency /
absenteeism, defective products, lateabsenteeism, defective products, latedelivery of raw materials etc.delivery of raw materials etc.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 11/47
11
Capacity Planning EnvironmentCapacity Planning EnvironmentCapacity Planning EnvironmentCapacity Planning Environment
Need for capacity planning. Need for capacity planning. Measurement of capacityMeasurement of capacity
MethodsMethods to increase effective capacity.to increase effective capacity.
Capacity planning decisions.Capacity planning decisions.
Role of forecasting in capacity needs.Role of forecasting in capacity needs.
O ptimal capacity determination.O ptimal capacity determination. Strategic capacity planning as key toStrategic capacity planning as key to
competitiveness.competitiveness.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 12/47
12
Need for Capacity PlanningNeed for Capacity PlanningNeed for Capacity PlanningNeed for Capacity Planning
To satisfy the future demand of products.To satisfy the future demand of products. Investments in facility are longInvestments in facility are long--term.term.
To keep the initial investment in theTo keep the initial investment in the
facility as low as possible to achievefacility as low as possible to achievelower break lower break--even volume.even volume.
To find theTo find the optimal capacityoptimal capacity of theof the
facility i.e. when [(cost of under facility i.e. when [(cost of under
capacity) + (cost of over capacity)] iscapacity) + (cost of over capacity)] is
minimum.minimum.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 13/47
13
Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity
Output Rate CapacityOutput Rate Capacity For a facility having a single product or aFor a facility having a single product or a
few homogeneous products, the unit of few homogeneous products, the unit of
measure is straightforward (barrels of beer measure is straightforward (barrels of beer per month) per month)
For a facility having a diverse mix of For a facility having a diverse mix of
products, an products, an aggregate unit of capacityaggregate unit of capacity
must be established using a common unitmust be established using a common unit
of output (sales dollars per week)of output (sales dollars per week)
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 14/47
14
Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity
Input Rate CapacityInput Rate Capacity
Commonly used for service operationsCommonly used for service operations
where output measures are particularlywhere output measures are particularly
difficult :difficult :
Hospitals use available beds per monthHospitals use available beds per month
Airlines use available seatAirlines use available seat--miles per miles per
monthmonth
Movie theatres use available seats per Movie theatres use available seats per
monthmonth
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 15/47
15
Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity
Capacity Utilization PercentageCapacity Utilization Percentage
Relates actual output to output capacityRelates actual output to output capacity
Example: Actual automobiles producedExample: Actual automobiles produced
in a quarter divided by the quarterlyin a quarter divided by the quarterly
automobile production capacityautomobile production capacity
Relates actual input used to input capacityRelates actual input used to input capacity
Example: Actual accountant hours usedExample: Actual accountant hours used
in a month divided by the monthlyin a month divided by the monthly
accountaccount--hours availablehours available
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 16/47
16
Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity
Capacity CushionCapacity Cushion
An additional amount of capacity added ontoAn additional amount of capacity added onto
the expected demand to allow for:the 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 flexibility product and volume flexibility
improved quality of products and servicesimproved quality of products and services
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 17/47
17
Methods to Increase Effective CapacityMethods to Increase Effective CapacityMethods to Increase Effective CapacityMethods to Increase Effective Capacity
Proper process quality control to ensure lesser defectiveProper process quality control to ensure lesser defectiveitems.items.
Proper facility location, layout and internal workingProper facility location, layout and internal working
conditions.conditions.
Make long batch sizes to reduce no. of setMake long batch sizes to reduce no. of set--ups required.ups required.
Proper implementation of environmental and pollutionProper implementation of environmental and pollution
control norms.control norms.
Good motivation & training and less absenteeism andGood motivation & training and less absenteeism andturnover on the part of workers.turnover on the part of workers.
Good coordination with suppliers.Good coordination with suppliers.
Proper scheduling of products on machines to reduce idleProper scheduling of products on machines to reduce idle
time.time.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 18/47
18
Capacity Planning DecisionsCapacity Planning DecisionsCapacity Planning DecisionsCapacity Planning Decisions
Assessing existing capacity.Assessing existing capacity.
Forecasting capacity needs.Forecasting capacity needs.
Identifying alternative ways to modifyIdentifying alternative ways to modifycapacity.capacity.
Evaluating financial and technologicalEvaluating financial and technological
impacts on capacity.impacts on capacity. Selecting a capacity alternative most suitedSelecting a capacity alternative most suited
to strategic mission.to strategic mission.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 19/47
19
Forecasting Capacity DemandForecasting Capacity DemandForecasting Capacity DemandForecasting Capacity Demand
Consider the life of the input (e.g. facilityConsider the life of the input (e.g. facility
is 10is 10--30 yr)30 yr)
Understand product life cycle as itUnderstand product life cycle as itimpacts capacityimpacts capacity
Anticipate technological developmentsAnticipate technological developments
Anticipate competitors¶ actionsAnticipate competitors¶ actions Forecast the firm¶s demandForecast the firm¶s demand
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 20/47
20
Other Considerations in ForecastingOther Considerations in ForecastingOther Considerations in ForecastingOther Considerations in Forecasting
Resource availabilityResource availability
Accuracy of the longAccuracy of the long--rangerange
forecastforecast
Capacity cushionCapacity cushion
Changes in competitiveChanges in competitiveenvironmentenvironment
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 21/47
21
General Trends in Demand ForecastingGeneral Trends in Demand ForecastingGeneral Trends in Demand ForecastingGeneral Trends in Demand Forecasting
Growth TrendGrowth Trend
DeclineT
rendDeclineT
rendCyclical TrendCyclical Trend
Stable TrendStable Trend
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 22/47
22
Expansion of LongExpansion of Long--Term CapacityTerm CapacityExpansion of LongExpansion of Long--Term CapacityTerm 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
Overtime to workersOvertime to workers
Running plant in more shiftsRunning plant in more shifts
Accumulate inventory during period of low demandAccumulate inventory during period of low demand MultiMulti--skill employeesskill employees
Hire more employeesHire more employees
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 23/47
23
Reduction of LongReduction of Long--Term CapacityTerm CapacityReduction of LongReduction of Long--Term CapacityTerm Capacity
Sell off existing resources, laySell off existing resources, lay
off employeesoff employees
Mothball facilities, transfer Mothball facilities, transfer employeesemployees
Develop andDevelop and phase phase--inin newnew products/services products/services
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 24/47
24
Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale
Best operating levelBest operating level -- least average unitleast average unit
cost.cost.
Economies of scaleEconomies of scale -- average cost per average cost per
unit decreases as the volume increasesunit decreases as the volume increases
toward the best operating leveltoward the best operating level
Diseconomies of scaleDiseconomies of scale -- average cost per average cost per unit increases as the volume increasesunit increases as the volume increases
beyond the best operating level beyond the best operating level
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 25/47
25
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 O perating LevelBest O perating Level
EconomiesEconomiesof Scaleof Scale
DiseconomiesDiseconomiesof Scaleof Scale
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 26/47
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 27/47
27
Diseconomies of ScaleDiseconomies of ScaleDiseconomies of ScaleDiseconomies of Scale
Increasing costs result from increasedIncreasing costs result from increasedcongestion of workers and material, whichcongestion of workers and material, which
contributes to: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 diseconomies« and other diseconomies
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 28/47
28
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
All at OnceAll at Once ± ± build the build the
ultimate facility now and growultimate facility now and grow
into itinto it IncrementallyIncrementally ± ± build build
incrementally as capacityincrementally as capacitydemand growsdemand grows
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 29/47
29
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
All at OnceAll at Once
Little risk of having to turn down business due toLittle 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 thanOne 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 stableMost appropriate for mature products with stable
demanddemand
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 30/47
30
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
Two General ApproachesTwo General Approaches
to Expanding Longto Expanding Long--Range CapacityRange Capacity
IncrementallyIncrementally
Less risky if forecast needs do notLess risky if forecast needs do not
materializematerialize Funds that could be used for other Funds that could be used for other
types of investments will not betypes of investments will not be
tied up in excess capacitytied up in excess capacity
More appropriate for new productsMore appropriate for new products
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 31/47
31
Subcontractor NetworksSubcontractor NetworksSubcontractor NetworksSubcontractor Networks
A viable alternative to larger A viable alternative to larger--capacity facilities iscapacity facilities isto develop subcontractor and supplier networks.to develop subcontractor and supplier networks.
³Farming out´ or outsourcing your capacity³Farming out´ or outsourcing your capacityneeds to your suppliersneeds to your suppliers
Developing longDeveloping long--range relationships withrange relationships withsuppliers of parts, components, andsuppliers of parts, components, andsubassembliessubassemblies
Relying less on backward vertical integrationRelying less on backward vertical integration Requiring less capital for production facilitiesRequiring less capital for production facilities
More easily varying capacity during slack or More easily varying capacity during slack or
peak demand periods peak demand periods
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 32/47
3
2
Outsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service Functions
Building maintenanceBuilding maintenance Data processingData processing
DeliveryDelivery
PayrollPayroll Book Book--keepingkeeping
Customer serviceCustomer service
MailroomMailroom Benefits administrationBenefits administration
«« and moreand more
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 33/47
33
Economies of ScopeEconomies of ScopeEconomies of ScopeEconomies of Scope
The ability to produce many productThe ability to produce many productmodels in one flexible facility moremodels in one flexible facility more
cheaply than in separate facilitiescheaply than in separate facilities
Highly flexible and programmableHighly flexible and programmable
automation allows quick, inexpensiveautomation allows quick, inexpensive
product product--toto--product changes product changes
Economies are created by spreading theEconomies are created by spreading the
automation cost over many productsautomation cost over many products
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 34/47
34
Analyzing CapacityAnalyzing Capacity--Planning DecisionsPlanning DecisionsAnalyzing CapacityAnalyzing Capacity--Planning DecisionsPlanning Decisions
Break Break--Even AnalysisEven Analysis
PresentPresent--Value AnalysisValue Analysis
Computer SimulationComputer Simulation Waiting Line AnalysisWaiting Line Analysis
Linear ProgrammingLinear Programming Decision Tree AnalysisDecision Tree Analysis
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 35/47
35
Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing
Break Break--Even AnalysisEven AnalysisK ingK ing PublishingPublishing intendsintends toto publish publish aa book book inin residentialresidentiallandscapinglandscaping.. FixedFixed costscosts areare $$125125,,000000 per per year,year,variablevariable costscosts per per unitunit areare $$3232,, andand sellingselling price price per per unitunit
isis $$4242..AA) How many units must be sold per year to break even?) How many units must be sold per year to break even?
B) How much annual revenue is required to break even?B) How much annual revenue is required to break even?
C) If annual sales are 20,000 units, what are the annualC) If annual sales are 20,000 units, what are the annual profits? profits?
D) What variable cost per unit would result in $100,000D) What variable cost per unit would result in $100,000annual profits if annual sales are 20,000 units?annual profits if annual sales are 20,000 units?
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 36/47
36
Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing
Break Break--EvenEven AnalysisAnalysis
A) How many units must be sold per year toA) How many units must be sold per year to
break even? break even?
Q = FC/(pQ = FC/(p--v) = $125,000/(42v) = $125,000/(42 ± ± 32) = 12,500 books32) = 12,500 books
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 37/47
37
Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing
Break Break--Even AnalysisEven Analysis
B) How much annual revenue is required toB) How much annual revenue is required to
break even? break even?
TR TR == pQ pQ = 42(12,500) = $525,000= 42(12,500) = $525,000
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 38/47
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 39/47
39
Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing
Break Break--Even AnalysisEven AnalysisD) What variable cost per unit would result inD) What variable cost per unit would result in
$100,000 annual profits if annual sales are$100,000 annual profits if annual sales are
20,000 units?20,000 units?
P =P = pQ pQ ± ± (FC +(FC + vQvQ))
100,000 = 42(20,000)100,000 = 42(20,000) ± ± [125,000 + v(20,000)][125,000 + v(20,000)]
100,000 = 840,000100,000 = 840,000 ± ± 125,000125,000 ± ± 20,000v20,000v20,000v = 615,00020,000v = 615,000
v = $30.75v = $30.75
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 40/47
40
Decision Tree AnalysisDecision Tree AnalysisDecision Tree AnalysisDecision Tree Analysis
Structures complexStructures complex multiphase decisionmultiphase decisions,s,
showing:showing:
What decisions must be madeWhat decisions must be made
What sequence the decisions must occur What 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
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 41/47
41
Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café
Decision Tree AnalysisDecision Tree AnalysisGood Eats Café is about to build a newGood Eats Café is about to build a new
restaurant. An architect has developedrestaurant. An architect has developed threethree
building designs building designs, each with a different, each with a differentseating capacity. Good Eats estimates that theseating capacity. Good Eats estimates that the
average number of customers per hour will beaverage number of customers per hour will be
8
0, 100, or 120 with respective probabilities of 8
0, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff 0.4, 0.2, and 0.4. The payoff tabletable showingshowing
the profits for the three designs is on the nextthe profits for the three designs is on the next
slide.slide.
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 42/47
42
Payoff TablePayoff Table
Average Number of Customers Per Hour Average 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 Hour Average 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
Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 43/47
43
Expected Value ApproachExpected Value ApproachCalculate the expected value for eachCalculate the expected value for each
decision. The decision tree on the nextdecision. The decision tree on the next
slide can assist in this calculation. Hereslide can assist in this calculation. Hered d 11,, d d 22,, d d 33 represent the decisionrepresent the decision
alternatives of designsA, B, C, andalternatives of designsA, B, C, and cc11,, cc22,,
cc33 represent the different average customer represent the different average customer volumes (80, 100, and 120) that mightvolumes (80, 100, and 120) that might
occur.occur.
Expected Value ApproachExpected Value ApproachCalculate the expected value for eachCalculate the expected value for each
decision. The decision tree on the nextdecision. The decision tree on the next
slide can assist in this calculation. Hereslide can assist in this calculation. Hered d 11,, d d 22,, d d 33 represent the decisionrepresent the decision
alternatives of designsA, B, C, andalternatives of designsA, B, C, and cc11,, cc22,,
cc33 represent the different average customer represent the different average customer volumes (80, 100, and 120) that mightvolumes (80, 100, and 120) that might
occur.occur.
Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 44/47
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 45/47
45
Expected Value For Each DecisionExpected Value For Each Decision
Choose the design with largestChoose the design with largest EVEV i.e. Design C.i.e. Design C.
33
44
d d 11
d d 22
d d 33
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
DesignADesignA
Design BDesign B
Design CDesign C
22
11
Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 46/47
46
WrapWrap--Up:WorldUp:World--Class PracticeClass PracticeWrapWrap--Up:WorldUp:World--Class PracticeClass Practice
Outstanding longOutstanding long--range businessrange business plans plans
LongLong--range capacity studiesrange capacity studies
Justify investment on how itJustify investment on how it
positions their company to capture positions their company to capture
market sharemarket share Facility location decisions involveFacility location decisions involve
worldwide search for sitesworldwide search for sites
8/8/2019 05 Module05 Facility Capacity 98
http://slidepdf.com/reader/full/05-module05-facility-capacity-98 47/47
47
End of Module-5End of Module-5