mba iind sem pom chapter 08 capacity planning and facilities location

55

Capacity Planning

For Products and Services

5-2

Learning ObjectivesLearning Objectives

Explain the importance of capacity planning.

Discuss ways of defining and measuring capacity.

Describe the determinants of effective capacity.

Discuss the major considerations related to developing capacity alternatives.

Briefly describe approaches that are useful for evaluating capacity alternatives

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Capacity PlanningCapacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

Capacity also includes Equipment Space Employee skills

The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?

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1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning

Importance of Capacity DecisionsImportance of Capacity Decisions

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CapacityCapacity

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output rate of output actually achieved--cannot

exceed effective capacity.

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Efficiency and UtilizationEfficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

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Actual output = 36 units/day Efficiency = =

90% Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day =

72% Design capacity 50 units/day

Efficiency/Utilization ExampleEfficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

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Determinants of Effective Determinants of Effective CapacityCapacity

Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

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Strategy FormulationStrategy Formulation

Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities

Cost of building and operating

Technological changes Rate and direction of technology changes

Behavior of competitors Availability of capital and other inputs

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Key Decisions of Capacity Key Decisions of Capacity PlanningPlanning

1. Amount of capacity needed• Capacity cushion (100% - Utilization)

2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

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Steps for Capacity PlanningSteps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative

7. Implement alternative chosen

8. Monitor results

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Forecasting Capacity Forecasting Capacity RequirementsRequirements

Long-term vs. short-term capacity needs Long-term relates to overall level of capacity

such as facility size, trends, and cycles Short-term relates to variations from

seasonal, random, and irregular fluctuations in demand

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Calculating Processing Calculating Processing RequirementsRequirements

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines

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Need to be near customers Capacity and location are closely tied

Inability to store services Capacity must be matched with timing of

demand

Degree of volatility of demand Peak demand periods

Planning Service CapacityPlanning Service Capacity

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In-House or OutsourcingIn-House or Outsourcing

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

Outsource: obtain a good or service from an external provider

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Developing Capacity AlternativesDeveloping Capacity Alternatives

1.Design flexibility into systems

2.Take stage of life cycle into account

3.Take a “big picture” approach to capacity changes

4.Prepare to deal with capacity “chunks”

5.Attempt to smooth out capacity requirements

6.Identify the optimal operating level

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Bottleneck OperationBottleneck OperationFigure 5.2

Machine #2Machine #2BottleneckOperation

BottleneckOperation

Machine #1Machine #1

Machine #3Machine #3

Machine #4Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations

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Bottleneck OperationBottleneck Operation

Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

10/hr.

Bottleneck

Maximum output ratelimited by bottleneck

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Economies of ScaleEconomies of Scale

Economies of scale If the output rate is less than the optimal level,

increasing output rate results in decreasing average unit costs

Diseconomies of scale If the output rate is more than the optimal

level, increasing the output rate results in increasing average unit costs

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Optimal Rate of Output

Minimumcost

Av

era

ge

co

st

per

un

it

0 Rate of output

Production units have an optimal rate of output for minimal cost.

Figure 5.4

Minimum average cost per unit

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Economies of ScaleEconomies of Scale

Minimum cost & optimal operating rate are functions of size of production unit.

Av

era

ge

co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

Figure 5.5

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Evaluating AlternativesEvaluating Alternatives

Cost-volume analysis Break-even point

Financial analysis Cash flow Present value

Decision theory Waiting-line analysis

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5.6a

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0

Total r

evenue

Figure 5.6b

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Total r

even

ue

Total cost

Figure 5.6c

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1.One product is involved2.Everything produced can be sold3.Variable cost per unit is the same

regardless of volume4.Fixed costs do not change with volume5.Revenue per unit constant with volume6.Revenue per unit exceeds variable cost

per unit

Assumptions of Cost-Volume Assumptions of Cost-Volume AnalysisAnalysis

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Financial AnalysisFinancial Analysis

Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes.

Present Value - the sum, in current value, of all future cash flows of an investment proposal.

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Decision TheoryDecision Theory

Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty

Suited to capacity decisions

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Waiting-Line AnalysisWaiting-Line Analysis

Useful for designing or modifying service systems

Waiting-lines occur across a wide variety of service systems

Waiting-lines are caused by bottlenecks in the process

Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity

Location Planning and Analysis

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Learning ObjectivesLearning Objectives

List some of the main reasons organizations need to make location decisions.

Explain why location decisions are important. Discuss the options that are available for location

decisions. Describe some of the major factors that affect

location decisions. Outline the decision process for making these

kinds of decisions. Use the techniques presented to solve typical

problems.

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Need for Location DecisionsNeed for Location Decisions

Marketing Strategy

Cost of Doing Business

Growth

Depletion of Resources

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Nature of Location DecisionsNature of Location Decisions

Strategic Importance of location decisions Long term commitment/costs Impact on investments, revenues, and operations Supply chains

Objectives of location decisions Profit potential No single location may be better than others Identify several locations from which to choose

Location Options Expand existing facilities Add new facilities Move

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Making Location DecisionsMaking Location Decisions

Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives

Identify general region Identify a small number of community

alternatives Identify site alternatives

Evaluate and make selection

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Location Decision FactorsLocation Decision Factors

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations

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Location of raw materials Location of markets Labor factors Climate and taxes

Regional FactorsRegional Factors

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Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

Community ConsiderationsCommunity Considerations

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Land Transportation Environmental Legal

Site Related FactorsSite Related Factors

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Product plant strategy Market area plant strategy Process plant strategy

Multiple Plant StrategiesMultiple Plant Strategies

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Service and Retail LocationsService and Retail Locations

Manufacturers – cost focused Service and retail – revenue focused

Traffic volume and convenience most important Demographics

Age Income Education

Location, location, location Good transportation Customer safety

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Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing Considerations

Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking

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Trends in LocationsTrends in Locations

Foreign producers locating in U.S. “Made in USA” Currency fluctuations

Just-in-time manufacturing techniques Microfactories Information Technology

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Global LocationsGlobal Locations

Reasons for globalization Benefits Disadvantages Risks Global operations issues

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GlobalizationGlobalization

Facilitating Factors Trade agreements Technology

Benefits Markets Cost savings Legal and regulatory Financial

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GlobalizationGlobalization

Disadvantages Transportation costs Security Unskilled labor Import restrictions Criticisms

Risks Political Terrorism Legal Cultural

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Foreign Government

a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards Liability laws

b. Stability issues

Cultural Differences

Living circumstances for foreign workers / dependents Religious holidays/traditions

Customer Preferences

Possible buy locally sentiment

Labor Level of training and education of workers Work ethic Possible regulations limiting number of foreign employees Language differences

Resources Availability and quality of raw materials, energy, transportation infrastructure

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Evaluating LocationsEvaluating Locations

Cost-Profit-Volume Analysis Determine fixed and variable costs

Plot total costs

Determine lowest total costs

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Location Cost-Volume AnalysisLocation Cost-Volume Analysis

Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

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Example 1: Cost-Volume AnalysisExample 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations

L o c a t i o n F i x e dC o s t

V a r i a b l eC o s t

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5

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Example 1: SolutionExample 1: Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0

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Example 1: SolutionExample 1: Solution

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

BC

B SuperiorC Superior

A Superior

D

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Evaluating LocationsEvaluating Locations

Transportation Model Decision based on movement costs of raw

materials or finished goods

Factor Rating Decision based on quantitative and

qualitative inputs

Center of Gravity Method Decision based on minimum distribution

costs