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Capacity planning Slide 1 Capacity planning Slide 2 Capacity planning Slide 3 Capacity planning Slide 4 Capacity planning Slide 5 Capacity planning Slide 6 Capacity planning Slide 7 Capacity planning Slide 8 Capacity planning Slide 9 Capacity planning Slide 10 Capacity planning Slide 11 Capacity planning Slide 12 Capacity planning Slide 13 Capacity planning Slide 14 Capacity planning Slide 15 Capacity planning Slide 16 Capacity planning Slide 17 Capacity planning Slide 18 Capacity planning Slide 19 Capacity planning Slide 20 Capacity planning Slide 21 Capacity planning Slide 22 Capacity planning Slide 23 Capacity planning Slide 24 Capacity planning Slide 25 Capacity planning Slide 26 Capacity planning Slide 27 Capacity planning Slide 28 Capacity planning Slide 29 Capacity planning Slide 30 Capacity planning Slide 31 Capacity planning Slide 32 Capacity planning Slide 33 Capacity planning Slide 34 Capacity planning Slide 35 Capacity planning Slide 36
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Capacity planning

  1. 1. 1 Capacity Planning & Facility Location
  2. 2. 2 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
  3. 3. Capacity planning  Capacity planning is central to the long-term success of an organization. Capacity plans are made at two levels:  (i) Long-term capacity plans : which deal with investments in new facilities and equipments covering the requirements for at least two years into the future and  (ii) Short-term capacity plans : which focus on work-force size, overtime budgets, inventories etc. 3
  4. 4. Capacity planning A long term strategic decision that establishes a firm’s overall level resources.  Three major capacity decisions are:  i. How much capacity to be installed,  ii. When to increase capacity and  iii. How much to increase 4
  5. 5. TYPES OF CAPACITY  Production capacity: Maximum rate of production or output of an organization. (e.g., 100 cars per day etc .. )  Design capacity: The maximum output that can possibly be attained.  Effective capacity: The maximum output given a product mix, scheduling difficulties, machine maintenance, quality factors, absenteeism etc.  Maximum capacity: The maximum output that a facility can achieve under ideal conditions. Also known as peak 5
  6. 6. DETERMINANTS OF EFFECTIVE CAPACITY Many decisions about design of the production system and operation of the production system may have an impact on capacity. The main factors relate to the following: (i) Facilities, (ii) Product or services, (iii) Process (iv) Human resource considerations, (v) Operations and (vi) External forces. 6
  7. 7. 7 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 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
  8. 8. 8 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
  9. 9. 9 Measuring Effectiveness of Capacity Use  Measures how much of the available capacity is actually being used:  Measures effectiveness  Use either effective or design capacity in denominator   100% capacity rate output actual n Utilizatio 
  10. 10. 10 Example of Computing Capacity Utilization: A bakery’s 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? 93% (100%) 30 28 (100%) capacity design output actual n Utilizatio 140% (100%) 20 28 (100%) capacity effective output actual n Utilizatio 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
  11. 11. 11 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
  12. 12. 12 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
  13. 13. 13 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
  14. 14. 14 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
  15. 15. 15 Identifying capacity requirements  Forecasting Capacity:  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  Strategic Implications  How much capacity a competitor might have  Potential for overcapacity in industry a possible hazard
  16. 16. 16 Developing & 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  Use decision support aids to evaluate decisions (decision tree most popular)
  17. 17. 17 Decision trees 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
  18. 18. 18 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
  19. 19. 19 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? (see notes)
  20. 20. 20 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 previous slide  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
  21. 21. 21 Evaluating the Decision Tree con’t  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!
  22. 22. 22 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
  23. 23. 23 Factors Affecting Location Decisions  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 (silicon valley)
  24. 24. 24 More Location Factors  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.
  25. 25. 25 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 to consider:  Language barriers, different laws & regulations, different business cultures
  26. 26. 26 Making Location Decisions Analysis should follow 3 step process: 1. Identify dominant location factors 2. Develop location alternatives 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
  27. 27. 27 Factor Rating Example
  28. 28. 28 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:  Multiply by the number of loads between each site and the four cities miles 45 15 40 10 30 dAB     
  29. 29. 29 Calculating the Load-Distance Score for 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)
  30. 30. 30 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  Is there another possible warehouse location closer to the C.G. that should be considered?? Why? 10.6 41 436 l Y l Y ; 7.9 41 325 l X l X i i i c.g. i i i c.g.           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
  31. 31. 31 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
  32. 32. 32 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
  33. 33. 33 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. Example9.6UsingBreak-EvenAnalysis Location FixedCost VariableCost TotalCost 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
  34. 34. 34 The Transportation Method  Can be used to solve specific location problems  Is discussed in detail in the supplement to this text  Could be used to evaluate the cost impact of adding potential location sites to the network of existing facilities  Could also be used to evaluate adding multiple new sites or completely redesigning the network
  35. 35. 35 Capacity Planning & Facility Location within OM  Decisions about capacity and location are highly dependent on forecasts of demand (Ch 8).  Capacity is also affected by operations strategy (Ch 2), as size of capacity is a key element of organizational structure.  Other operations decisions that are affected by capacity and location are issues of job design and labor skills (Ch 11), choice on the mix of labor and technology, as well as choices on technology and automation (Ch 3).
  36. 36. 36 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

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