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T

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by Kamille Valdez on 5 September 2012

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Transcript of T

Chapter 9 CAPACITY AND
LOCATION DECISIONS CAPACITY can be defined as the maximum output rate that can be achieved by a facility. Planning for capacity in a company is usually performed at two levels, each corresponding to either strategic or tactical decisions. First level of capacity decisions is strategic and long term in nature. This is where a company decides what investments in new facilities and equipment it should make. Second level of capacity decisions is more tactical in nature – focusing on short term issues that include planning of workforce, inventories and day-to-day use of machines. CAPACITY PLANNING Capacity Planning is the process of establishing the output rate that can be achieved by a facility. If a company does not plan its capacity correctly, it may find that it either does not have enough output capability to meet customer demands nor has too much capacity sitting idle time. MEASURING CAPACITY
Although the definition of capacity is simple,
there is no one way of measuring it. amount of available capacity
which helps us understand how much capacity our facility has. effectiveness of capacity use
which will tell us how effectively we are using our available capacity. MEASURING AVAILABLE CAPACITY
Consider this example: A bakery can make 20 pies per day. However, if they are really pushed, such as during holiday seasons, they can make 30 pies per day. DESIGN CAPACITY
the maximum output rate that can be achieved by a facility in an ideal condition. In our example that is 30 pies per day. EFFECTIVE CAPACITY
the maximum output rate that can be sustained under normal conditions. In our example, that is 20 pies per day. CAPACITY UTILIZATION percentage measure of how well available capacity is being used. A bakery can make 20 pies per day. However, if they are really pushed, such as during holiday seasons, they can make 30 pies per day. Currently, the bakery is producing 27 pies per day. What is the bakery’s capacity utilization relative to both design and effective capacity? The utilization rates show that the bakery’s current output is only slightly below its design capacity and output is considerably higher than its effective capacity. The bakery then can probably operate at this level at a short time. CAPACITY
CONSIDERATIONS 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 BEST OPERATING
LEVEL AND SIZE Best operating levels as functions of facility size Different operating levels at a facility Alternative 1: Purchase one large facility, requiring one large initial investment. Alternative 2: Add capacity incrementally in smaller chunks as needed. 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 MAKING CAPACITY PLANNING DECISIONS DECISION TREES Step 1. Identify Capacity Requirements. Identify the levels of capacity needed by the company now, as well as in the future. A company cannot decide whether to purchase a new facility without knowing exactly the gap between available capacity and future requirements. FORECASTING CAPACITY
Capacity decisions are Strategic and Long-term in nature. Long-term capacity requirements are identified on the basis of forecasts of future demand. Companies look for long-term patterns such as trends when making such forecasts. Forecasting at this level is performed using qualitative forecasting methods such as executive opinion and Delphi method which use subjective opinions of experts. CAPACITY CUSHION
Capacity Cushion is an amount of capacity added to the needed/regular capacity in order to provide greater flexibility, or the ability of business to respond to customer needs for different products or different volumes. It can be helpful if demand is greater than expected. STRATEGIC IMPLICATIONS
A company needs to consider how much capacity competitors are likely to have. Capacity is a strategic decision, and the position of a company in the market relative to its competitors is very much determined by its capacity. Step 2. Develop Capacity Alternatives. Once capacity requirements have been identified, the company needs to develop a set of alternatives that would enable it to meet future capacity needs. After assessing needs, the next step is to develop alternative ways to modify its capacity. CAPACITY ALTERNATIVES: 1. Do Nothing
One alternative is to Do Nothing and reevaluate the situation in the future. With this alternative, the company would not be able to meet any demands that exceed current capacity levels. This kind of alternative is a strategic decision. 2. Expand Large Now (purchase
one large facility now) 3. Expand Small Now, With Option to Add Later (add capacity incrementally) Step 3. Evaluate Capacity Alternatives. The last step in the procedure is to evaluate the capacity alternatives and select the one alternative that will best meet the company’s requirement. There are number of tools that we can use to evaluate our capacity alternatives. But these tools are only decision-support aids. Managers have to use many different inputs, as well as their judgment, in making final decisions. One most popular tool is the Decision tree. Decision tree is a diagram that models the alternatives being considered and the possible outcomes. It gives structure to a series of decisions and provides an objective way of evaluating alternatives. Decision Points
are points in time when decisions, whether to expand or not, are made. They are represented by squares, called “nodes”. Decision alternatives, such as buying a large facility or a small one, are represented by “branches” or arrows leaving a decision point. Outcomes
Each possible alternative has an outcome. Like in our example, expected profit for each alternative given each chance event. Chance Events
Events that affect the value of decision. Each chance event has a probability or likelihood of occurring (60% chance of high demand or 40% chance of low demand). The sum of probabilities of all chances must add up to 100%. They are represented by “branches” or arrow leaving circular nodes. PROCEDURE FOR DRAWING A DECISION TREE
1.Draw a decision tree from left to right. Use squares to indicate decisions and circles to indicate chance events.
2.Write the probability of each chance event in parenthesis.
3.Write out the outcome for each alternative in the right margin. PROCEDURE FOR SOLVING A DECISION TREE
1.To solve a decision tree, work from right to left. At each circle representing chance events, compute the expected value.
2.Write the EVs below each circle.
3.Select the alternative with the highest value. EXPECTED VALUE
It is a weighted average of chance events, where each chance event is given a probability of occurrence. 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? LOCATION ANALYSIS Techniques for determining location decisions. FACILITY LOCATION the best geographic location
for a company’s facility. FACTORS AFFECTING
LOCATION DECISIONS GLOBALIZATION Proximity to source of supply Reduce transportation costs of perishable or bulky raw materials Proximity to customers High population areas, close to JIT partners Proximity to labor Local wage rates, attitude toward unions, availability of special skills. Community considerations Local community’s attitude toward the facility (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. the process of locating
facilities around the world Potential advantages Inside track to foreign marketAvoid trade barrier Gain access to cheaper labor Potential disadvantages Political risks may increase
Loss of control of proprietary technologyLocal infrastructure (roads & utilities) may be inadequateHigh inflation Other issues to consider Language barrier
Different laws & regulations
Different business cultures PROCEDURE FOR MAKING LOCATION DECISIONS Step 1 Identify Dominant Location Factors
Step 2 Develop Location Alternatives
Step 3 Evaluate Location Alternatives PROCEDURE FOR EVALUATING LOCATION ALTERNATIVES FACTOR
RATING LOAD-DISTANCE
MODEL These are decision-support tools that help structure the decision-making process Evaluate multiple alternatives based on a number of selected factors. Step 1 Identify dominant factors

Step 2 Assign weights to factors

Step3 Select a scale by which to evaluate each location relative to each factor

Step 4 Evaluate each alternative relative to each factor

Step 5 For each factor and each location, multiply the weight of the factor by the score for that factor and sum the results for each alternative

Step 6 Select the alternative with the highest score USING FACTOR RATING
Antonio is evaluating three different locations for his new Filipino restaurant. Costs are comparable at all three locations. He has identified seven factors that he considers important and decided to use factor rating to evaluate his three location alternatives based on a five-point scale, with 1 being poor and 5 being the highest. A procedure for evaluating location alternatives based on distance
Objective: To select a location that minimizes the total amount of loads moved weighted by the distance traveled. What is LOAD?
Load represents the goods moved in or out of a facility or the number of movements between facilities. Step 1 Identify Distances
Rectilinear distance is the shortest distance between two points measured by using only north-south and east-west movements.
Step 2 Identify Loads
Step 3 Calculate the Load-Distance Score for Each Locatio USING THE LOAD-DISTANCE MODEL
KABERKS Corporation is considering where to locate its warehouse in order to service its four stores located in four Ohio cities: Cleveland, Columbus, Cincinnati, and Dayton Two possible sites for the warehouse are being considered. One is in Mansfield, Ohio, and the other is in Springfield, Ohio. The Center of Gravity Approach The location identified with
the center of gravity puts a larger penalty on long distances. However, geographic location may be a restriction in identifying locations. But still, the center of gravity provides an excellent starting point. BREAK EVEN ANALYSIS It is a technique used to compute the
amount of goods needed to cover all costs. Total cost = Fixed cost + (Variable Cost per unit x Number of units sold)
Total revenue = Price per unit x Number of units sold
Basic steps in using break-even
analysis for location selection: (1) For each location, determine the fixed and variable costs;
(2) Plot the total costs for each location on one graph;
(3) Identify ranges of output for which each location has the lowest total cost;
(4) Solve algebraically for the break-even points over the identified ranges. THE TRANSPORTATION METHOD
It is a useful technique for solving specific location problems. The method relies on a specific algorithm to evaluate the cost impact of adding potential location sites to the network of existing facilities.
CAPACITY PLANNING AND FACILITY LOCATION ACROSS THE ORGANIZATION Finance and Operations Management -
Operations managers need input from finance in order to finalize their capacity decisions. As we all know, capacity planning requires large financial expenditures. Location analysis which is tied to the capacity planning decisions is basically a financial investment. Marketing and Operations Management -
The amount of future and current capacity restrict the ability to meet demand. Building a large facility that enables the company to capture future demand and position itself in the marketplace could be advantageous from a marketing perspective. Marketing managers are in the best position to understand which location factors a most important to customers.
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