1. 2 Facility Capacity and Location Chapter 5, Part A.

1 1 2002 South-Western/Thomson Learning 2002 South-Western/Thomson Learning TMTM

Slides preparedSlides preparedby John Loucksby John Loucks

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Facility Capacity and Location

Chapter 5, Part AChapter 5, Part A

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OverviewOverview

Facility Planning Long-Range Capacity Planning Facility Location Wrap-Up: What World-Class Companies Do

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Facility PlanningFacility Planning

HOW MUCH long range capacity is needed WHEN additional capacity is needed WHERE the production facilities should be located WHAT the layout and characteristics of the facilities

should be

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Facility PlanningFacility Planning

The capital investment in land, buildings, technology, and machinery is enormous

A firm must live with its facility planning decisions for a long time, and these decisions affect:

Operating efficiency Economy of scale Ease of scheduling Maintenance costs … Profitability!

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Long-RangeCapacity Planning

Long-RangeCapacity Planning

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Steps in the Capacity Planning ProcessSteps in the Capacity Planning Process

Estimate the capacity of the present facilities. Forecast the long-range future capacity needs. Identify and analyze sources of capacity to meet these

needs. Select from among the alternative sources of capacity.

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Definitions of CapacityDefinitions of Capacity

In general, production capacity is the maximum production rate of an organization.

Capacity can be difficult to quantify due to … Day-to-day uncertainties such as employee

absences, equipment breakdowns, and material-delivery delays

Products and services differ in production rates (so product mix is a factor)

Different interpretations of maximum capacity

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Definitions of CapacityDefinitions of Capacity

The Federal Reserve Board defines sustainable practical capacity as the greatest level of output that a plant can maintain …

within the framework of a realistic work schedule taking account of normal downtime assuming sufficient availability of inputs to operate

the machinery and equipment in place

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Measurements of CapacityMeasurements of Capacity

Output Rate Capacity For a facility having a single product or a few

homogeneous products, the unit of measure is straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an aggregate unit of capacity must be established using a common unit of output (sales dollars per week)

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Input Rate Capacity Commonly used for service operations where

output measures are particularly difficult Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month

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Capacity Utilization Percentage Relates actual output to output capacity

Example: Actual automobiles produced in a quarter divided by the quarterly automobile production capacity

Relates actual input used to input capacity Example: Actual accountant hours used in a

month divided by the monthly account-hours available

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Capacity Cushion an additional amount of capacity added onto the

expected demand to allow for: greater than expected demand demand during peak demand seasons lower production costs product and volume flexibility improved quality of products and services

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Forecasting Capacity Demand Forecasting Capacity Demand

Consider the life of the input (e.g. facility is 10-30 yr) Understand product life cycle as it impacts capacity Anticipate technological developments Anticipate competitors’ actions Forecast the firm’s demand

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Other ConsiderationsOther Considerations

Resource availability Accuracy of the long-range forecast Capacity cushion Changes in competitive environment

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Expansion of Long-Term CapacityExpansion of Long-Term Capacity

Subcontract with other companies Acquire other companies, facilities, or resources Develop sites, construct buildings, buy equipment Expand, update, or modify existing facilities Reactivate standby facilities

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Reduction of Long-Term CapacityReduction of Long-Term Capacity

Sell off existing resources, lay off employees Mothball facilities, transfer employees Develop and phase in new products/services

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Economies of ScaleEconomies of Scale

Best operating level - least average unit cost Economies of scale - average cost per unit decreases

as the volume increases toward the best operating level

Diseconomies of scale - average cost per unit increases as the volume increases beyond the best operating level

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Economies and Diseconomies of ScaleEconomies and Diseconomies of Scale

Average UnitCost of Output ($)

Annual Volume (units)

Best Operating Level

Economiesof Scale

Diseconomiesof Scale

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Economies of ScaleEconomies of Scale

Declining costs result from: Fixed costs being spread over more and more units Longer production runs result in a smaller

proportion of labor being allocated to setups Proportionally less material scrap … and other economies

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Diseconomies of ScaleDiseconomies of Scale

Increasing costs result from increased congestion of workers and material, which contributes to:

Increasing inefficiency Difficulty in scheduling Damaged goods Reduced morale Increased use of overtime … and other diseconomies

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Two General Approaches to Expanding Long-Range Capacity


All at Once – build the ultimate facility now and grow into it

Incrementally – build incrementally as capacity demand grows

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All at Once Little risk of having to turn down business due to

inadequate capacity Less interruption of production One large construction project costs less than

several smaller projects Due to inflation, construction costs will be higher

in the future Most appropriate for mature products with stable

demand

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Incrementally Less risky if forecast needs do not materialize Funds that could be used for other types of

investments will not be tied up in excess capacity More appropriate for new products

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Subcontractor NetworksSubcontractor Networks

A viable alternative to larger-capacity facilities is to develop subcontractor and supplier networks.

“Farming out” or outsourcing your capacity needs to your suppliers

Developing long-range relationships with suppliers of parts, components, and subassemblies

Relying less on backward vertical integration Requiring less capital for production facilities More easily varying capacity during slack or peak

demand periods

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Outsourcing Service FunctionsOutsourcing Service Functions

Building maintenance Data processing Delivery Payroll Bookkeeping Customer service Mailroom Benefits administration … and more

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Economies of ScopeEconomies of Scope

The ability to produce many product models in one flexible facility more cheaply than in separate facilities

Highly flexible and programmable automation allows quick, inexpensive product-to-product changes

Economies are created by spreading the automation cost over many products

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Analyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning Decisions

Break-Even Analysis (Chapter 4 and this chapter) Present-Value Analysis Computer Simulation (Chapter 9) Waiting Line Analysis (Chapter 9) Linear Programming (Chapter 8) Decision Tree Analysis (this chapter)

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Example: King PublishingExample: King Publishing

Break-Even AnalysisKing Publishing intends to publish a book in

residential landscaping. Fixed costs are $125,000 per year, variable costs per unit are $32, and selling price per unit is $42.

A) How many units must be sold per year to break even? B) How much annual revenue is required to break even? C) If annual sales are 20,000 units, what are the annual profits? D) What variable cost per unit would result in $100,000 annual profits if annual sales are 20,000 units?

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Break-Even Analysis

A) How many units must be sold per year to break even?

Q = FC/(p-v) = $125,000/(42 – 32) = 12,500 books

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Break-Even Analysis

B) How much annual revenue is required to break even?

TR = pQ = 42(12,500) = $525,000

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Break-Even Analysis

C) If annual sales are 20,000 units, what are the annual profits?

P = pQ – (FC + vQ)

= 42(20,000) – [125,000 + 32(20,000)]

= 840,000 – 125,000 – 640,000

= $75,000

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Break-Even AnalysisD) What variable cost per unit would result in $100,000

annual profits if annual sales are 20,000 units?

P = pQ – (FC + vQ)

100,000 = 42(20,000) – [125,000 + v(20,000)]

100,000 = 840,000 – 125,000 – 20,000v

20,000v = 615,000

v = $30.75

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Decision Tree AnalysisDecision Tree Analysis

Structures complex multiphase decisions, showing: What decisions must be made What sequence the decisions must occur Interdependence of the decisions

Allows objective evaluation of alternatives Incorporates uncertainty Develops expected values

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Example: Good Eats CaféExample: Good Eats Café

Decision Tree Analysis

Good Eats Café is about to build a new restaurant. An architect has developed three building designs, each with a different seating capacity. Good Eats estimates that the average number of customers per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff table showing the profits for the three designs is on the next slide.

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Payoff Table

Average Number of Customers Per Hour

c1 = 80 c2 = 100 c3 = 120

Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000

Payoff Table

Average Number of Customers Per Hour

c1 = 80 c2 = 100 c3 = 120

Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000


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Expected Value ApproachCalculate the expected value for each decision.

The decision tree on the next slide can assist in this calculation. Here d1, d2, d3 represent the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur.

Expected Value ApproachCalculate the expected value for each decision.

The decision tree on the next slide can assist in this calculation. Here d1, d2, d3 represent the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur.


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Decision Tree

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(.2)

(.4)

(.4)

(.4)

(.2)

(.4)

(.4)

(.2)

(.4)

d1

d2

d3

c1

c1

c1

c2

c3

c2

c2

c3

c3

Payoffs

10,000

15,000

14,000

8,000

18,000

12,000

6,000

16,000

21,000

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Expected Value For Each Decision

Choose the design with largest EV -- Design C.

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d1

d2

d3

EV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600

EV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600

EV = .4(6,000) + .2(16,000) + .4(21,000) = $14,000

Design A

Design B

Design C

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Facility Location

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A Sequence of DecisionsA Sequence of Decisions

National DecisionNational Decision

Regional DecisionRegional Decision

Community DecisionCommunity Decision

Site DecisionSite Decision

Political, social, economic stability;Currency exchange rates; . . . . .

Climate; Customer concentrations;Degree of unionization; . . . . .

Transportation system availability;Preference of management; . . . . .

Site size/cost; Environmental impact; Zoning restrictions; . . . . .

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Factors Affecting the Location Decision


Economic Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes

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Non-economic Labor attitudes and traditions Training and employment services Community’s attitude Schools and churches Recreation and cultural attractions Amount and type of housing available

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Facility Types and TheirDominant Locational Factors


Mining, Quarrying, and Heavy Manufacturing Near their raw material sources Abundant supply of utilities Land and construction costs are inexpensive

Light Manufacturing Availability and cost of labor

Warehousing Proximity to transportation facilities Incoming and outgoing transportation costs

. . . more

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R&D and High-Tech Manufacturing Ability to recruit/retain scientists, engineers, etc. Near companies with similar technology interests

Retailing and For-Profit Services Near concentrations of target customers

Government and Health/Emergency Services Near concentrations of constituents

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Some Reasons the Facility Location Decision Arises


Changes in the market Expansion Contraction Geographic shift

Changes in inputs Labor skills and/or costs Materials costs and/or availability Utility costs

. . . more

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Changes in the environment Regulations and laws Attitude of the community

Changes in technology

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Analyzing Service Location DecisionsAnalyzing Service Location Decisions

Consumer BehaviorResearch

Consumer BehaviorResearch

Market ResearchMarket Research

Data Gathering for Each Location Alternative

Data Gathering for Each Location Alternative

Revenue Projections forEach Location AlternativeRevenue Projections for

Each Location Alternative

Why do customers buy ourproducts and services?

Who are our customers?What are their characteristics?

What are the economic projections?What is the time-phased revenue?

Profit Projections forEach Location Alternative

Profit Projections forEach Location Alternative

What are the projected revenuesless time-phased operating costs?

Where are our customers concentrated?What are their traffic/spending patterns?

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Analyzing Industrial Facility LocationsAnalyzing Industrial Facility Locations

Factors that tend to dominate the industrial-facility location decision are:

Transportation costs Labor cost and availability Materials cost and availability Utilities cost

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Analyzing Industrial Facility LocationsAnalyzing Industrial Facility Locations

Locating a Single Facility A simple way to analyze alternative locations is

conventional cost analysis Pros – ease of communication and understanding Cons – time value of money ignored and

qualitative factors not considered Locating Multiple Facilities

More sophisticated techniques are often used: Linear programming, computer simulation, network analysis, and others

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Qualitative Factors in Location DecisionsQualitative Factors in Location Decisions

Often-important qualitative factors include Housing Climate Community activities Education and health services Recreation Churches Union activities Community attitudes

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Integrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative Factors

Managers often wrestle with the task of trading off qualitative factors against quantitative ones

Methods for systematically displaying the relative advantages and disadvantages, both qualitative and quantitative, of each location alternative have been developed

The relative-aggregate-scores approach is one such method

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Relative-Aggregate-Scores ApproachRelative-Aggregate-Scores Approach

Quantitative and Qualitative Factors

Location A Location B

Econ. Wgt. Econ. Wgt.

Factor Weight Data Score Score Data Score Score

Prod.cost/ton .45 $65 .923 .415 $60 1.000.450

Transp.cost/ton .35 $18 1.000 .350 $21 .857.300

Labor Avail. .15 .700 .105 .500.075

Union Activity .05 .450 .023 .750.038

Total Score .893.863

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Wrap-Up: World-Class PracticeWrap-Up: World-Class Practice

Outstanding long-range business plans Long-range capacity studies

Justify investment on how it positions their company to capture market share

Facility location decisions involve worldwide search for sites

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End of Chapter 5, Part AEnd of Chapter 5, Part A

1. 2 Facility Capacity and Location Chapter 5, Part A.

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Transcript of 1. 2 Facility Capacity and Location Chapter 5, Part A.