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Capacity Planning & Facility Location

(Chapter 9)

Production & Operations Management

INFO 335-71

Week 2

2

Learning Objectives

⚫ Define capacity planning

⚫ Define location analysis

⚫ Describe the decision support tools used for capacity

planning

⚫ Identify key factors in location analysis

⚫ Describe the decision support tools used for location

analysis

3

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

4

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, input measures work better

Type of Business Input Measures of

Capacity

Output Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail store Floor space in

square feet Revenue per foot

Measuring Capacity

⚫ Two types of information needed:

1. Amount of available capacity

▪ design capacity (max. possible output rate

▪ effective capacity (max. sustainable output rate)

2. Effectiveness of capacity use

▪ How effectively we are using the available capacity

5

( )100% capacity

rateoutput actual nUtilizatio =

6

Example of Computing Capacity Utilization: A bakery’s

design capacity is 30 custom cakes per day with an

effective capacity of 20 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?

93%(100%) 30

28 (100%)

capacity design

output actual nUtilizatio

140%(100%) 20

28 (100%)

capacity effective

output actual nUtilizatio

design

effective

===

===

⚫ 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

7

Capacity Considerations - Best

Operating Level and Size

⚫ When expanding capacity, there are two alternatives: 1. Purchase one large facility, requiring one large initial investment

2. Add capacity incrementally in smaller chunks as needed

Fixed Cost = $100,000

Variable Cost =

$2/unit

If you produce 150,000 units, then total cost = 100,000 + 150,000*2 =

$400,000

Per unit cost = $400,000/150,000 units = $2.67/unit

8

Making Capacity Planning

Decisions

The three-step procedure for making capacity planning

decisions is as follows:

1. Identify Capacity Requirements

2. Develop Capacity Alternatives

3. Evaluate Capacity Alternatives

9

Decision Trees

Diagramming technique

• Decision points – points in time when decisions are made, squares called nodes

• Decision alternatives – branches or arrows leaving a decision point (nodes)

• Chance events – events that could affect a decision, branches or arrows leaving circular chance nodes

• Outcomes – each possible alternative listed

10

Example Using Decision Trees: A restaurant owner has

determined that she needs to expand her facility.

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?

D1 – Expand Small: High Demand (O1 = 200,000, p1 = .7); Low Demand (O2 = 80,000, p2 = .3)

Expected Value (D1) = ∑Oi*Pi = O1*p1 + O2*p2 = 200,000*.7 + 80,000*.3

11

Evaluating the Decision Tree

⚫ Refer to previous slide

• Calculate Expected Value (EV) of small expansion: • EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000

• Calculate EV of large expansion: • EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000

Take the calculated risk!

12

Location Analysis

⚫ Three most important factors in real estate: Location,

Location, Location

⚫ Facility location is the process of identifying the best

geographic location for a service or production facility

⚫ Long term commitment

⚫ Sizable financial investment and impact

13

Factors Affecting Location Decisions

⚫ Proximity to source of supply

⚫ Proximity to customers

⚫ Proximity to labor

⚫ Community considerations

⚫ Site considerations

⚫ Quality-of-life issues

⚫ Other considerations: • Options for future expansion, local competition,

transportation access and congestion, etc.

⚫ Globalization

14

Making Location Decisions

⚫ Analysis should follow 3 step process: 1. Identify dominant location factors

2. Develop location alternatives

3. Evaluate locations alternatives

⚫ Procedures/tools for evaluating location alternatives include • Factor rating method • Load-distance model • Center of gravity approach • Break-even analysis

15

Factor Rating (with example)

A procedure to evaluate multiple alternative locations based on a number of selected factors.

16

A Load-Distance Model Example: Matrix Manufacturing

is considering where to locate its warehouse 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:

⚫ Multiply by the number of loads between each site and four cities

miles 4515401030dAB =−+−=

A procedure for evaluating location alternatives based on distance.

Dayton-Mansfield = |3 – 11| + |6 -14| = 16

17

Calculating Load-Distance Score:

Springfield vs. Mansfield

⚫

The load-distance score for Mansfield is higher than for Springfield. The

warehouse should be located in Springfield.

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)

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The Center of Gravity Approach

Requires the analyst to find the center of gravity of the geographic area being considered for an alternative site.

⚫ Computing the Center of Gravity for Matrix Manufacturing

⚫ Is there another possible warehouse location closer to the C.G. that should be considered?? Why?

10.6 41

436

l

Yl Y ; 7.9

41

325

l

Xl X

i

ii

c.g.

i

ii

c.g. ======  

 

19

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 ($) for Quanity Q

A 350,000.00 5 350,000 + 5*Q

B 170,000.00 25 170,000 + 25*Q

C 100,000.00 40 100,000 + 40*Q

D 250,000.00 20 250,000 + 20*Q

⚫ Breakeven point or point of

indifference:

100,000 + 40*Q = 170,000 +25*Q

40Q – 25Q = 170,000 – 100,000

15Q = 70,000

Q = 4667 A: 350,000 + 5*Q = 350,000 + 5*9000 = 350,000 + 45,000 = 395,000

B: 170,000 +25*Q = 170,000 + 25*9000 = 170,000 + 225,000 = 395,000