Chapter 5

Capacity and Location Planning

Chapter 5: Capacity and Location Planning 1

Examples

Chapter 5: Capacity and Location Planning 2

 Burger King
 Highly variable demand
 During lunch hour, demand can increase
from 40 to 800 hamburgers/hour
 Limited in ability to used inventory
 Facilities designed for flexible capacity
 During off peak times drive through
staffed by one worker

Chapter 5: Capacity and Location Planning 3

 Burger King continued
 During lunch hour drive through staffed
by up to five workers who divide up the
duties
 Second window can be used for
customer with special orders
 Average transaction time reduced from
45 to 30 seconds
 Sales during peak periods increased 50%

Chapter 5: Capacity and Location Planning 4

 Burger King continued
 Payroll costs as large as food costs
 Need to keep costs low but at same time
meet highly variable demand
 BK-50 restaurant is 35% smaller and
costs 27% less to build, but can handle
40% more sales with less labor

Chapter 5: Capacity and Location Planning 5

 Semiconductor Industry
 Learning from the steel industry
 Both industries require large and
expensive factories
 1980s steel industry started to abandon
economies of scale justification and built
minimills
 Chipmakers are now constructing
smaller and more automated wafer fabs
Chapter 5: Capacity and Location Planning 6
 Semiconductor Industry continued
 Short life cycles make it difficult to
recoup $2 billion it will cost to build wafer
fab in 1998
 Payback time is 22-30 month to
conventional wafer fab versus 10 months
for minifab
 Processing time can be reduced from 60-
90 days to 7 days.
Chapter 5: Capacity and Location Planning 7
 Mercedes-Benz
 Early 1990s investigated feasibility of
producing luxury sports utility vehicle
 Project team established to find location
for new plant
 Team charged with finding plant outside
of Germany
 Team initially narrowed search to North
America
Chapter 5: Capacity and Location Planning 8
 Mercedes-Benz continued
 Team determined that North America
location would minimize combined labor,
shipping, and components cost
 Plans indicated production volume of
65,000 vehicles per year and a
breakeven volume of 40,000 vehicles
 Sites further narrowed to sites within US
 Close to primary market
Chapter 5: Capacity and Location Planning 9
 Mercedes-Benz continued
 Minimize penalties associated with
currency fluctuations
 100 sites in 35 state identified
 Primary concern was transportation cost
 Since half production was for export,
focused on sites close to seaports, rail
lines, and major highways

Chapter 5: Capacity and Location Planning 10

 Mercedes-Benz continued
 Worker age and mix of skills also
considered
 Sites narrowed to sites in NC, SC, and AL
 These sites relatively equal in terms of
business climate, education level,
transportation, and long-term costs
 AL chosen due to perception of high
dedication to the project
Chapter 5: Capacity and Location Planning 11
 Geographic Information Systems
 View and analyze data on digital maps
 Retail store in WI analyzed sales data on
a map
 The map demonstrated that each store
drew majority of sales from 20 mile radius
 Map highlighted area where only 15% of
potential customers had visited one of its
stores
Chapter 5: Capacity and Location Planning 12
 Sport Obermeyer
 Highly volatile demand
 Combined costs of stockouts and markdowns
can exceed manufacturing costs
 Determine which items can and cannot be
predicted well
 Products that can be predicted produced
furthest in advance
 Increased its sales of fashion skiwear 50% to
100% over 3 year period in 1990s
Chapter 5: Capacity and Location Planning 13
 Insights
 Capacity planning applies to both
manufacturing and service organizations
 Capacity options can be categorized as
short-term or long-term
 Changing staffing level is short-term
 Building new minifab is long-term

Chapter 5: Capacity and Location Planning 14

 Insights continued
 Semiconductor industry illustrates the
enormous cost often associated with
expanding capacity
 Shorter product life cycles add further
complications
 Volatile demand can further complicate
capacity planning

Chapter 5: Capacity and Location Planning 15

 Introduction
 Capacity needs determined on the basis
of forecast of demand.
 In addition to determining capacity
needed, the location of the capacity must
also be determined.
 Mercedes-Benz example illustrates that
location decisions are often made in
stages.
Chapter 5: Capacity and Location Planning 16
 Sport Obermeyer
 Highly volatile demand
 Combined costs of stockouts and markdowns
can exceed manufacturing costs
 Determine which items can and cannot be
predicted well
 Products that can be predicted produced
furthest in advance
 Increased its sales of fashion skiwear 50% to
100% over 3 year period in 1990s
Chapter 5: Capacity and Location Planning 17
Forecasting Purposes and
Methods

Chapter 5: Capacity and Location Planning 18

 Primary Uses of Forecasting
 To determine if sufficient demand exists
 To determine long-term capacity needs
 To determine midterm fluctuations in demand
so that short-sighted decisions are not made
that hurt company in long-run
 To determine short-term fluctuations in
demand for production planning, workforce
scheduling, and materials planning

Chapter 5: Capacity and Location Planning 19

 Forecasting Methods
 Informal (intuitive)
 Formal
 Quantitative
 Qualitative

Chapter 5: Capacity and Location Planning 20

Forecasting Methods

Chapter 5: Capacity and Location Planning 21

 Qualitative Methods
 Life cycle
 Surveys
 Delphi
 Historical analogy
 Expert opinion
 Consumer panels
 Test marketing
Chapter 5: Capacity and Location Planning 22
 Quantitative Methods
 Causal
 Input-output
 Econometric
 Box-Jenkins
 Autoprojection
 Multiplicative
 Exponential smoothing
 Moving average
Chapter 5: Capacity and Location Planning 23
 Choosing a Forecasting Method
 Availability of representative data
 Time and money limitations
 Accuracy needed

Chapter 5: Capacity and Location Planning 24

Long-Term Capacity/Location
Planning

Chapter 5: Capacity and Location Planning 25

 Terminology
 Maximum rate of output of the
transformation system over some
specified duration
 Capacity issues applicable to all
organizations
 Often services cannot inventory output
 Bottlenecks
 Yield (or revenue) management
Chapter 5: Capacity and Location Planning 26
 Long-term Capacity Planning
 Unit cost as function of facility size
 Economies of scale
 Economies of scope

Chapter 5: Capacity and Location Planning 27

Envelope of Lowest Unit Output Costs with
Facility Size

Chapter 5: Capacity and Location Planning 28

 Demand and Life Cycles for Multiple
Outputs
 Demand Seasonality
 Output Life Cycles

Chapter 5: Capacity and Location Planning 29

Anti-cyclic Product Sales

Chapter 5: Capacity and Location Planning 30

Forecast of Required Organizational
Capacity from Multiple Life Cycles

Chapter 5: Capacity and Location Planning 31

Timing of Capacity Increments

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Location Planning Strategies

Chapter 5: Capacity and Location Planning 33

 Capabilities and the Location
Decision
 Often driven too much by short-term
considerations
 wage rates
 exchange rates
 Better approach is to consider how
location impacts development of long-
term capabilities

Chapter 5: Capacity and Location Planning 34

 Six Step Process
 Identify sources of value
 Identify capabilities needed
 Assess implications of location decision
on development of capabilities
 Identify potential locations
 Evaluate locations
 Develop strategy for building network of
locations
Chapter 5: Capacity and Location Planning 35
 Stage 1: Regional-International
 Minimize transportation costs and provide
acceptable service
 Proper supply of labor
 Wage rates
 Unions (right-to-work laws)
 Regional taxes, regulations, trade barriers
 Political stability

Chapter 5: Capacity and Location Planning 36

 Stage 2: Community
 Availability of acceptable sites
 Local government attitudes
 Regulations, zoning, taxes, labor supply
 Tax Incentives
 Community’s attitude
 Amenities

Chapter 5: Capacity and Location Planning 37

Breakeven Location Model

Chapter 5: Capacity and Location Planning 38

 Stage 3: Site
 Size
 Adjoining land
 Zoning
 Drainage
 Soil
 Availability of water, sewers, utilities
 Development costs
Chapter 5: Capacity and Location Planning 39
Weighted Score Model

Wi = importance of factor i
Si = score of location being
evaluated on
factor i
i = an index for the factors
Total weighted score =  WiSi
i

Chapter 5: Capacity and Location Planning 40

 Locating Pure Service Organizations
 Recipient to Facility
 facility utilization
 travel distance per citizen
 travel distance per visit
 Facility to Recipient

Chapter 5: Capacity and Location Planning 41

Short Term Capacity Planning

Chapter 5: Capacity and Location Planning 42

Bottlenecks in Sequential
Operations

Chapter 5: Capacity and Location Planning 43

Efficiency and Output Increase when
Machines are Being Added

Chapter 5: Capacity and Location Planning 44

Product and Service Flows

Chapter 5: Capacity and Location Planning 45

Process Flow Map for a Service

Chapter 5: Capacity and Location Planning 46

 Implementing the Theory of
Constraints
 Identify the system’s constraints
 Exploit the constraint
 Subordinate all else to the constraint
 Elevate the constraint
 If constraint is no longer a bottleneck,
find the next constraint and repeat the
steps.

Chapter 5: Capacity and Location Planning 47

 Relationship between Capacity and
Scheduling
 Capacity is oriented toward the
acquisition of productive resources
 Scheduling related to the timing of the
use of resources

Chapter 5: Capacity and Location Planning 48

Gantt Charts for Capacity Planning and
Scheduling (Infeasible)

Chapter 5: Capacity and Location Planning 49

Gantt Charts for Capacity Planning
and Scheduling (Feasible)

Chapter 5: Capacity and Location Planning 50

 Short-Term Capacity Alternatives
 Increase resources
 Improve resource use
 Modify the output
 Modify the demand
 Do not meet demand

Chapter 5: Capacity and Location Planning 51

 Increase Resources
 Overtime
 Add shifts
 Employ part-time workers
 Use floating workers
 Subcontract

Chapter 5: Capacity and Location Planning 52

 Improve Resource Use
 Overlap or stagger shifts
 Schedule appointments
 Inventory output
 Backlog demand

Chapter 5: Capacity and Location Planning 53

 Modify the Output
 Standardize the output
 Have recipient do part of the work
 Transform service operations into
inventoriable product operations
 Cut back on quality

Chapter 5: Capacity and Location Planning 54

 Demand Options
 Modify the Demand
 change the price
 change the promotion
 Do Not Meet Demand

Chapter 5: Capacity and Location Planning 55

 Capacity Planning for Services
 Large fluctuations in demand
 Inventory often not an option
 Problem often is to match staff
availability with customer demand
 May attempt to shift demand to off-peak
periods
 Can measure capacity in terms of inputs

Chapter 5: Capacity and Location Planning 56

The Learning Curve

Chapter 5: Capacity and Location Planning 57

 Background
 In airframe manufacturing industry
observed that each time output doubled,
labor hour per plane decreased by fixed
percentage

Chapter 5: Capacity and Location Planning 58

Learning Curve Function
M = mNr

M = labor-hours for Nth unit

m = labor-hours for first unit
N = number of units produced
r = exponent of curve
= log(learning rate)/0.693

Chapter 5: Capacity and Location Planning 59

Typical Pattern of Learning and
Forgetting

Chapter 5: Capacity and Location Planning 60

Queuing and the Psychology
of Waiting

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 Waiting-Line Analysis
 Mechanism to determine several key
performance measures of operating
system.
 Trade-off two costs
 cost of waiting
 cost of service

Chapter 5: Capacity and Location Planning 62

Waiting Line Analysis

Chapter 5: Capacity and Location Planning 63

 Principles of Waiting
 Unoccupied time feels longer than
occupied time.
 Pre-service waiting feels longer than in-
service waiting.
 Anxiety makes waiting seem longer.
 Uncertain waiting is longer than known,
finite waiting.

Chapter 5: Capacity and Location Planning 64

Principles of Waiting continued
 Unexplained waiting is longer than
explained waiting.
 Unfair waiting is longer than fair waiting.
 Solo waiting is longer than group
waiting.
 The more valuable the service, the
longer it is worth waiting for.

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Chapter 5: Capacity and Location Planning 66