Professional Documents
Culture Documents
by John Loucks
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Overview
Facility Planning
Long-Range Capacity Planning
Facility Location
Wrap-Up: What World-Class Companies Do
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Facility Planning
HOW MUCH long range capacity is needed
WHEN additional capacity is needed
WHERE the production facilities should be located
WHAT the layout and characteristics of the facilities
should be
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Facility Planning
The capital investment in land, buildings, technology,
and machinery is enormous
A firm must live with its facility planning decisions
for a long time, and these decisions affect:
Operating efficiency
Economy of scale
Ease of scheduling
Maintenance costs
… Profitability!
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Long-Range
Capacity Planning
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Steps in the Capacity Planning Process
Estimate the capacity of the present facilities.
Forecast the long-range future capacity needs.
Identify and analyze sources of capacity to meet these
needs.
Select from among the alternative sources of
capacity.
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Definitions of Capacity
In general, production capacity is the maximum
production rate of an organization.
Capacity can be difficult to quantify due to …
Day-to-day uncertainties such as employee
absences, equipment breakdowns, and material-
delivery delays
Products and services differ in production rates (so
product mix is a factor)
Different interpretations of maximum capacity
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Definitions of Capacity
The Federal Reserve Board defines sustainable
practical capacity as the greatest level of output that a
plant can maintain …
within the framework of a realistic work schedule
taking account of normal downtime
assuming sufficient availability of inputs to
operate the machinery and equipment in place
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Measurements of Capacity
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Measurements of Capacity
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Measurements of Capacity
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Measurements of Capacity
Capacity Cushion
an additional amount of capacity added onto the
expected demand to allow for:
greater than expected demand
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Forecasting Capacity Demand
Consider the life of the input (e.g. facility is 10-30 yr)
Understand product life cycle as it impacts capacity
Anticipate technological developments
Anticipate competitors’ actions
Forecast the firm’s demand
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Other Considerations
Resource availability
Accuracy of the long-range forecast
Capacity cushion
Changes in competitive environment
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Expansion of Long-Term Capacity
Subcontract with other companies
Acquire other companies, facilities, or resources
Develop sites, construct buildings, buy equipment
Expand, update, or modify existing facilities
Reactivate standby facilities
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Reduction of Long-Term Capacity
Sell off existing resources, lay off employees
Mothball facilities, transfer employees
Develop and phase in new products/services
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Economies of Scale
Best operating level - least average unit cost
Economies of scale - average cost per unit decreases
as the volume increases toward the best operating
level
Diseconomies of scale - average cost per unit
increases as the volume increases beyond the best
operating level
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Economies and Diseconomies of Scale
Average Unit
Cost of Output ($)
Economies Diseconomies
of Scale of Scale
Declining costs result from:
Fixed costs being spread over more and more units
Longer production runs result in a smaller
proportion of labor being allocated to setups
Proportionally less material scrap
… and other economies
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Diseconomies of Scale
Increasing costs result from increased congestion of
workers and material, which contributes to:
Increasing inefficiency
Difficulty in scheduling
Damaged goods
Reduced morale
Increased use of overtime
… and other diseconomies
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Two General Approaches
to Expanding Long-Range Capacity
All at Once – build the ultimate facility now and
grow into it
Incrementally – build incrementally as capacity
demand grows
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Two General Approaches
to Expanding Long-Range Capacity
All at Once
Little risk of having to turn down business due to
inadequate capacity
Less interruption of production
One large construction project costs less than
several smaller projects
Due to inflation, construction costs will be higher
in the future
Most appropriate for mature products with stable
demand
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Two General Approaches
to Expanding Long-Range Capacity
Incrementally
Less risky if forecast needs do not materialize
Funds that could be used for other types of
investments will not be tied up in excess capacity
More appropriate for new products
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Subcontractor Networks
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Outsourcing Service Functions
Building maintenance
Data processing
Delivery
Payroll
Bookkeeping
Customer service
Mailroom
Benefits administration
… and more
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Economies of Scope
The ability to produce many product models in one
flexible facility more cheaply than in separate
facilities
Highly flexible and programmable automation allows
quick, inexpensive product-to-product changes
Economies are created by spreading the automation
cost over many products
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Analyzing Capacity-Planning Decisions
Break-Even Analysis (Chapter 4 and this chapter)
Present-Value Analysis
Computer Simulation (Chapter 9)
Waiting Line Analysis (Chapter 9)
Linear Programming (Chapter 8)
Decision Tree Analysis (this chapter)
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Example: King Publishing
Break-Even Analysis
King Publishing intends to publish a book in
residential landscaping. Fixed costs are $125,000 per
year, variable costs per unit are $32, and selling price
per unit is $42.
A) How many units must be sold per year to
break even? B) How much annual revenue is
required to break even? C) If annual sales are 20,000
units, what are the annual profits? D) What variable
cost per unit would result in $100,000 annual profits
if annual sales are 20,000 units?
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Example: King Publishing
Break-Even Analysis
A) How many units must be sold per year to break even?
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Example: King Publishing
Break-Even Analysis
B) How much annual revenue is required to break even?
TR = pQ = 42(12,500) = $525,000
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Example: King Publishing
Break-Even Analysis
C) If annual sales are 20,000 units, what are the annual
profits?
P = pQ – (FC + vQ)
= 42(20,000) – [125,000 + 32(20,000)]
= 840,000 – 125,000 – 640,000
= $75,000
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Example: King Publishing
Break-Even Analysis
D) What variable cost per unit would result in $100,000
annual profits if annual sales are 20,000 units?
P = pQ – (FC + vQ)
100,000 = 42(20,000) – [125,000 + v(20,000)]
100,000 = 840,000 – 125,000 – 20,000v
20,000v = 615,000
v = $30.75
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Decision Tree Analysis
Structures complex multiphase decisions, showing:
What decisions must be made
What sequence the decisions must occur
Interdependence of the decisions
Allows objective evaluation of alternatives
Incorporates uncertainty
Develops expected values
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Example: Good Eats Café
Decision Tree Analysis
Good Eats Café is about to build a new
restaurant. An architect has developed three building
designs, each with a different seating capacity. Good
Eats estimates that the average number of customers
per hour will be 80, 100, or 120 with respective
probabilities of 0.4, 0.2, and 0.4. The payoff table
showing the profits for the three designs is on the
next slide.
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Example:
Example: Good
Good Eats
Eats Café
Café
Payoff Table
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Example:
Example: Good
Good Eats
Eats Café
Café
Expected Value Approach
Calculate the expected value for each decision.
The decision tree on the next slide can assist in this
calculation. Here d11, d22, d33 represent the decision
alternatives of designs A, B, C, and c11, c22, c33 represent
the different average customer volumes (80, 100, and
120) that might occur.
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Example:
Example: Good
Good Eats
Eats Café
Café
Decision Tree Payoffs
c1 (.4) 10,000
c2 (.2)
22 15,000
c3 (.4)
d1 14,000
c1 (.4)
d2 8,000
11 c2 (.2)
33 18,000
d3 c3 (.4)
12,000
c1 (.4)
6,000
c2 (.2)
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c3 16,000
(.4)
21,000
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Example:
Example: Good
Good Eats
Eats Café
Café
Expected Value For Each Decision
EV = .4(10,000) + .2(15,000) + .4(14,000)
d1 = $12,600
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Design A
EV = .4(8,000) + .2(18,000) + .4(12,000)
Design B d2 = $11,600
1 3
d3
Design C
EV = .4(6,000) + .2(16,000) + .4(21,000)
= $14,000
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A Sequence of Decisions
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Factors
Factors Affecting
Affecting
the
the Location
Location Decision
Decision
Economic
Site acquisition, preparation and construction costs
Labor costs, skills and availability
Utilities costs and availability
Transportation costs
Taxes
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Factors
Factors Affecting
Affecting
the
the Location
Location Decision
Decision
Non-economic
Labor attitudes and traditions
Training and employment services
Community’s attitude
Schools and churches
Recreation and cultural attractions
Amount and type of housing available
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Facility Types and Their
Dominant Locational Factors
Mining, Quarrying, and Heavy Manufacturing
Near their raw material sources
Abundant supply of utilities
Land and construction costs are inexpensive
Light Manufacturing
Availability and cost of labor
Warehousing
Proximity to transportation facilities
Incoming and outgoing transportation costs
. . . more
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Facility Types and Their
Dominant Locational Factors
R&D and High-Tech Manufacturing
Ability to recruit/retain scientists, engineers, etc.
Near companies with similar technology interests
Retailing and For-Profit Services
Near concentrations of target customers
Government and Health/Emergency Services
Near concentrations of constituents
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Some Reasons the
Facility Location Decision Arises
Changes in the market
Expansion
Contraction
Geographic shift
Changes in inputs
Labor skills and/or costs
Materials costs and/or availability
Utility costs
. . . more
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Some Reasons the
Facility Location Decision Arises
Changes in the environment
Regulations and laws
Attitude of the community
Changes in technology
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Analyzing Service Location Decisions
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Analyzing Industrial Facility Locations
Locating a Single Facility
A simple way to analyze alternative locations is
conventional cost analysis
Pros – ease of communication and understanding
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Integrating Qualitative & Quantitative Factors
Managers often wrestle with the task of trading off
qualitative factors against quantitative ones
Methods for systematically displaying the relative
advantages and disadvantages, both qualitative and
quantitative, of each location alternative have been
developed
The relative-aggregate-scores approach is one such
method
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Relative-Aggregate-Scores Approach
Quantitative and Qualitative Factors
Location A Location B
Econ. Wgt. Econ. Wgt.
Factor Weight Data Score Score Data Score
Score
Prod.cost/ton .45 $65 .923 .415 $60 1.000 .450
Transp.cost/ton .35 $18 1.000 .350 $21 .857 .300
Labor Avail. .15 .700 .105 .500 .075
Union Activity .05 .450 .023 .750 .038
Total Score .893 .863
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Wrap-Up: World-Class Practice
Outstanding long-range business plans
Long-range capacity studies
Justify investment on how it positions their company
to capture market share
Facility location decisions involve worldwide search
for sites
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End
End of
of Chapter
Chapter 5,
5, Part
Part A
A
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