CHAPTER

Capacity Planning and Facility Location

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Learning Objectives
Define & explain capacity planning Define & explain location analysis Describe the relationship between capacity planning & location analysis Describe decision support tools for capacity planning & location analysis

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Capacity Planning
Capacity is the maximum output rate of a production or service facility Capacity planning is the process of establishing the available capacity:
Strategic issues: capital expenditures in facility & equipment Tactical issues: workforce & inventory levels, & day-to-day use of equipment

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Measuring Capacity
Type of Business Car manufacturer Hospital Pizza parlor Retail store Input Measures of Output Measures Capacity of Capacity Labor hours Available beds Labor hours Floor space in square feet Cars per shift Patients per month Pizzas per day Revenue per foot

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Available Capacity
Design capacity:
Maximum output rate under ideal conditions

Effective capacity:
Maximum output rate under normal (realistic) conditions

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Capacity Utilization
Measures how much of the available capacity is actually being used:
actual output rate 100 % Utilizatio n capacity

Measures effectiveness Use either effective or design capacity in denominator

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How Much Capacity?

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)
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Best Operating Level

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Choose Capacity by Matching Forecast & Best Operating Level

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Other Issues
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

Capacity cushions:
Plan to underutilize capacity to provide flexibility
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Evaluating Alternatives
Decision trees:
A modeling tool for evaluating sequential decisions Identify 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)
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Decision Trees
Build from the present to the future:
Distinguish between decisions (under your control) & chance events (out of your control, but can be estimated to a given probability)

Solve from the future to the present:

Generate an expected value for each decision point based on probable outcomes of subsequent events
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Example

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Interpretation
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

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 its the worst decision:
Take the calculated risk!
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Facility Location
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

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Factors to Consider
Proximity to suppliers:
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)

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More Factors
Community considerations:
Local communitys attitude toward the facility (e.g.: prisons, utility plants, etc.)

Site considerations:
Local zoning & taxes, access to utilities, etc.

Qualityof-life issues:
Climate, cultural attractions, commuting time, etc.

Other considerations:
Options for future expansion, local competition, etc.
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Globalization
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

Other issues:
Language barriers, different laws & regulations, different business cultures
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Decision Support Tools

Factor rating method Load-distance model Center of gravity approach Break-even analysis Transportation method

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Factor Rating Method

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Load Distance Model

Calculate the rectilinear distance:

Multiply by the number of loads

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The End
Copyright 2002 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.

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