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Optimize your operations with strategic capacity planning and facility location analysis
1.
Chapter 9– Capacity
Planning & Facility Location Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007 PowerPoint Presentation by R.B. Clough – UNH M. E. Henrie - UAA © Wiley 2007
2.
Learning Objectives
Define capacity planning Define location analysis Describe relationship between capacity planning and location, and their importance Explain the steps involved in capacity planning and location analysis © Wiley 2007
3.
Learning Objectives -
continued Describe the decision support tools used for capacity planning Identify key factors in location analysis Describe the decision support tools used for location analysis © Wiley 2007
4.
Capacity planning
Capacity is the maximum output rate of a facility Capacity planning is the process of establishing the output rate that can be achieved at a facility: Capacity is usually purchased in “chunks” Strategic issues: how much and when to spend capital for additional facility & equipment Tactical issues: workforce & inventory levels, & day-to-day use of equipment © Wiley 2007
5.
Measuring Capacity Examples
There is no one best way to measure capacity Output measures like kegs per day are easier to understand With multiple products, inputs measures work better Input Measures of Output Measures Type of Business Capacity of Capacity Car manufacturer Labor hours Cars per shift Hospital Available beds Patients per month Pizza parlor Labor hours Pizzas per day Floor space in Retail store Revenue per foot square feet © Wiley 2007
6.
Measuring Available Capacity
Design capacity: Maximum output rate under ideal conditions A bakery can make 30 custom cakes per day when pushed at holiday time Effective capacity: Maximum output rate under normal (realistic) conditions On the average this bakery can make 20 custom cakes per day © Wiley 2007
7.
Calculating Capacity Utilization
Measures how much of the available capacity is actually being used: actual output rate Utilization = ( 100%) capacity Measures effectiveness Use either effective or design capacity in denominator © Wiley 2007
8.
Example of Computing
Capacity Utilization: In the bakery example the design capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes per day. What is the bakery’s capacity utilization relative to both design and effective capacity? actual output 28 Utilization effective = (100%) = (100%) = 140% effective capacity 20 actual output 28 Utilization design = (100%) = (100%) = 93% design capacity 30 The current utilization is only slightly below its design capacity and considerably above its effective capacity The bakery can only operate at this level for a short period of time © Wiley 2007
9.
How Much Capacity
Is Best? The Best Operating Level is the output that results in the lowest average unit cost Economies of Scale: Where the cost per unit of output drops as volume of output increases Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material Diseconomies of Scale: Where the cost per unit rises as volume increases Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity © Wiley 2007
10.
Best Operating Level
and Size Alternative 1: Purchase one large facility, requiring one large initial investment Alternative 2: Add capacity incrementally in smaller chunks as needed © Wiley 2007
11.
Other Capacity Considerations
Focused factories: Small, specialized facilities with limited objectives Plant within a plant (PWP): Segmenting larger operations into smaller operating units with focused objectives Subcontractor networks: Outsource non-core items to free up capacity for what you do well © Wiley 2007
12.
Making Capacity Planning
Decisions The three-step procedure for making capacity planning decisions is as follows: Step 1: Identify Capacity Requirements Step 2: Develop Capacity Alternatives Step 3: Evaluate Capacity Alternatives © Wiley 2007
13.
Identifying capacity requirements
Long-term capacity requirements based on future demand Identifying future demand based on forecasting Forecasting, at this level, relies on qualitative forecast models Executive opinion Delphi method Forecast and capacity decision must included strategic implications Capacity cushions Plan to underutilize capacity to provide flexibility © Wiley 2007
14.
Evaluating Capacity Alternatives
Capacity alternatives include Could do nothing, expand large now (may included capacity cushion), or expand small now with option to add later © Wiley 2007
15.
Evaluating Capacity Alternatives
Many tools exist to assist in evaluating alternatives Most popular tool is Decision Trees Decision Trees analysis tool is: a modeling tool for evaluating sequential decisions which, identifies the alternatives at each point in time (decision points), estimate probable consequences of each decision (chance events) & the ultimate outcomes (e.g.: profit or loss) © Wiley 2007
16.
Decision tree diagrams
Diagramming technique which uses Decision points – points in time when decisions are made, squares called nodes Decision alternatives – branches of the tree off the decision nodes Chance events – events that could affect a decision, branches or arrows leaving circular chance nodes Outcomes – each possible alternative listed © Wiley 2007
17.
Decision tree diagrams
Decision trees developed by Drawing from left to right Use squares to indicate decision points Use circles to indicate chance events Write the probability of each chance by the chance (sum of associated chances = 100%) Write each alternative outcome in the right margin © Wiley 2007
18.
Example Using Decision
Trees: A restaurant owner has determined that she needs to expand her facility. The alternatives are to expand large now and risk smaller demand, or expand on a smaller scale now knowing that she might need to expand again in three years. Which alternative would be most attractive? The likelihood of demand being high is .70 The likelihood of demand being low is .30 Large expansion yields profits of $300K(high dem.) or $50k(low dem.) Small expansion yields profits of $80K if demand is low Small expansion followed by high demand and later expansion yield a profit of $200K at that point. No expansion at that point yields profit of $150K © Wiley 2007
19.
Evaluating the Decision
Tree Decision tree analysis utilizes expected value analysis (EVA) EVA is a weighted average of the chance events Probability of occurrence * chance event outcome Refer to Figure 9-3 At decision point 2, choose to expand to maximize profits ($200,000 > $150,000) Calculate expected value of small expansion: EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000 © Wiley 2007
20.
Evaluating the Decision
Tree - continued Calculate expected value of large expansion: EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000 At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit: $225,000 > $164,000 Choose large expansion despite the fact that there is a 30% chance it’s the worst decision: Take the calculated risk! © Wiley 2007
21.
Location Analysis
Three most important factors in real estate: 1. Location 2. Location 3. Location Facility location is the process of identifying the best geographic location for a service or production facility © Wiley 2007
22.
Factors Affecting Location Decisions
Proximity to source of supply: Reduce transportation costs of perishable or bulky raw materials Proximity to customers: E.g.: high population areas, close to JIT partners Proximity to labor: Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley) © Wiley 2007
23.
More Location Factors
Community considerations: Local community’s attitude toward the facility (e.g.: prisons, utility plants, etc.) Site considerations: Local zoning & taxes, access to utilities, etc. Quality-of-life issues: Climate, cultural attractions, commuting time, etc. Other considerations: Options for future expansion, local competition, etc. © Wiley 2007
24.
Globalization - Should
Firm Go Global? Globalization is the process of locating facilities around the world Potential advantages: Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor Potential disadvantages: Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation Other issues: Language barriers, different laws & regulations, different business cultures © Wiley 2007
25.
Making Location Decisions
Analysis should follow 3 step process: Step 1: Identify dominant location factors Step 2: Develop location alternatives Step 3: Evaluate locations alternatives Procedures for evaluation location alternatives include Factor rating method Load-distance model Center of gravity approach Break-even analysis Transportation method © Wiley 2007
26.
Factor Rating Example
© Wiley 2007
27.
A Load-Distance Model
Example: Matrix Manufacturing is considering where to locate its warehouse in order to service its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision. Calculate the rectilinear distance: dAB = 30 − 10 + 40 − 15 = 45 miles Multiply by the number of loads between each site and the four cities © Wiley 2007
28.
Calculating the Load-Distance
Score for Springfield vs. Mansfield Computing the Load-Distance Score for Springfield City Load Distance ld Cleveland 15 20.5 307.5 Columbus 10 4.5 45 Cincinnati 12 7.5 90 Dayton 4 3.5 14 Total Load-Distance Score(456.5) Computing the Load-Distance Score for Mansfield City Load Distance ld Cleveland 15 8 120 Columbus 10 8 80 Cincinnati 12 20 240 Dayton 4 16 64 Total Load-Distance Score(504) The load-distance score for Mansfield is higher than for Springfield. The warehouse should be located in Springfield. © Wiley 2007
29.
The Center of
Gravity Approach This approach requires that the analyst find the center of gravity of the geographic area being considered Computing the Center of Gravity for Matrix Manufacturing Coordinates Load Location (X,Y) (li) lixi liyi Cleveland (11,22) 15 165 330 Columbus (10,7) 10 165 70 Cincinnati (4,1) 12 165 12 Dayton (3,6) 4 165 24 Total 41 325 436 Computing the Center of Gravity for Matrix Manufacturing Xc.g. = ∑ liXi = 325 = 7.9 ; Yc.g. = ∑ liYi = 436 = 10.6 ∑ li 41 ∑ li 41 Is there another possible warehouse location closer to the C.G. that should be considered?? Why? © Wiley 2007
30.
Break-Even Analysis
Break-even analysis computes the amount of goods required to be sold to just cover costs Break-even analysis includes fixed and variable costs Break-even analysis can be used for location analysis especially when the costs of each location are known Step 1: For each location, determine the fixed and variable costs Step 2: Plot the total costs for each location on one graph Step 3: Identify ranges of output for which each location has the lowest total cost Step 4: Solve algebraically for the break-even points over the identified ranges © Wiley 2007
31.
Break-Even Analysis
Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q. Total cost = F + cQ Total revenue = pQ Break-even is where Total Revenue = Total Cost Q = F/(p-c) Q = break-even quantity p = price/unit c = variable cost/unit F = fixed cost © Wiley 2007
32.
Example using Break-even
Analysis: Clean-Clothes Cleaners is considering four possible sites for its new operation. They expect to clean 10,000 garments. The table and graph below are used for the analysis. Example 9.6 Using Break-Even Analysis Location Fixed Cost Variable Cost Total Cost A $350,000 $ 5(10,000) $400,000 B $170,000 $25(10,000) $420,000 C $100,000 $40(10,000) $500,000 D $250,000 $20(10,000) $450,000 From the graph you can see that the two lowest cost intersections occur between C & B (4667 units) and B & A (9000 units) The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and above 9000 units the best site is A © Wiley 2007
33.
The Transportation Method
The transportation method of linear programming can be used to solve specific location problems It is discussed in detail in the supplement to this text It could be used to evaluate the cost impact of adding potential location sites to the network of existing facilities It could also be used to evaluate adding multiple new sites or completely redesigning the network © Wiley 2007
34.
Capacity Planning and
Facility Location Across the Organization Capacity planning and location analysis affect operations management and are important to many others Finance provides input to finalize capacity decisions Marketing impacted by the organizational capacity and location to customers © Wiley 2007
35.
Chapter 9 Highlights
Capacity planning is deciding on the maximum output rate of a facility Location analysis is deciding on the best location for a facility Capacity planning and location analysis decision are often made simultaneously because the location of the facility is usually related to its capacity. When a business decides to expand, it usually also addresses the issue of where to locate. These decisions are very important because they require long-term investments in buildings and facilities, as well as a sizable financial outlay. © Wiley 2007
36.
Chapter 9 Highlights
- continued In both capacity planning and location analysis, managers must follow three-step process to make good decision. The steps are assessing needs, developing alternatives, and evaluating alternatives. To choose between capacity planning alternatives managers may sue decision trees, which are a modeling tool for evaluating independent decisions that must be made in sequence. © Wiley 2007
37.
Chapter 9 Highlights
- continued Key factors in location analysis included proximity to customers, transportation, source of labor, community attitude, and proximity to supplies. Service and manufacturing firms focus on different factors. Profit-making and nonprofit organizations also focus on different factors. © Wiley 2007
38.
Chapter 9 Highlights
- continued Several tools can be sued to facilitate location analysis. Factor rating is a tool that helps managers evaluate qualitative factors. The load- distance model and center of gravity approach evaluate the location decision based on distance. Break-even analysis is sued to evaluate location decisions based on cost values. The transportation method is an excellent tool for evaluating the cost impact of adding sites to the network of current facilities. © Wiley 2007
39.
The End
Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. © Wiley 2007
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