Chapter 9– Capacity Planning & Facility LocationLearning ObjectivesLearning Objectives – con’tCapacity planningMeasuring Capacity ExamplesMeasuring Available CapacityMeasuring Effectiveness of Capacity UseExample 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?Capacity ConsiderationsBest Operating Level and SizeOther Capacity ConsiderationsMaking Capacity Planning DecisionsIdentifying capacity requirementsDeveloping & Evaluating Capacity AlternativesDecision treesDecision tree diagramsExample 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)Evaluating the Decision TreeEvaluating the Decision Tree con’tLocation AnalysisFactors Affecting Location DecisionsMore Location FactorsGlobalization – Should Firm Go Global?Making Location DecisionsFactor Rating ExampleA 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.Calculating the Load-Distance Score for Springfield vs. MansfieldThe Center of Gravity ApproachBreak-Even AnalysisSlide 30Example 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.The Transportation MethodCapacity Planning & Facility Location within OMCapacity Planning and Facility Location Across the OrganizationChapter 9 HighlightsChapter 9 Highlights – con’tSlide 37Slide 38Chapter 9 Homework Hints© Wiley 2010 1Chapter 9– Capacity Planning & Facility LocationOperations ManagementbyR. Dan Reid & Nada R. Sanders4th Edition © Wiley 2010© Wiley 2010 2Learning ObjectivesDefine capacity planningDefine location analysisDescribe relationship between capacity planning and location, and their importance Explain the steps involved in capacity planning and location analysis© Wiley 2010 3Learning Objectives – con’tDescribe the decision support tools used for capacity planningIdentify key factors in location analysisDescribe the decision support tools used for location analysis© Wiley 2010 4Capacity 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© Wiley 2010 5Measuring 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 betterType of BusinessInput Measures of CapacityOutput Measures of CapacityCar manufacturer Labor hours Cars per shiftHospital Available beds Patients per monthPizza parlor Labor hours Pizzas per dayRetail storeFloor space in square feetRevenue per foot© Wiley 2010 6Measuring 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© Wiley 2010 7Measuring 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%capacityrateoutput actualnUtilizatio © Wiley 2010 8Example 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%)3028(100%)capacity designoutput actual nUtilizatio140%(100%)2028(100%)capacity effectiveoutput actual nUtilizatiodesigneffective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© Wiley 2010 9Capacity 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© Wiley 2010 10Best 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© Wiley 2010 11Other 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© Wiley 2010 12Making Capacity Planning DecisionsThe three-step procedure for making capacity planning decisions is as follows:1. Identify Capacity Requirements2. Develop Capacity Alternatives3. Evaluate Capacity Alternatives© Wiley 2010 13Identifying 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