CAPACITY AND LOCATION DECISIONS

CAPACITY AND LOCATION DECISIONSOperations and Productions ManagementGroup IVCapacityThe maximum output rate that can be achieved by a facilityCapacity PlanningThe process of establishing the output rate that can be achieved by a facilityIMPORTANCE OF CAPACITY PLANNINGImpacts ability to meet future demandsAffects operating costsMajor determinant of initial costsInvolves long-term commitmentAffects competitivenessAffects ease of managementMEASURING CAPACITYTwo types of information needed in discussing capacity:Amount of available capacityEffectiveness of capacity useMEASURING AVAILABLE CAPACITYDesign capacityThe maximum output rate that can be achieved by a facility under ideal conditionsEffective capacityThe maximum output rate that can be sustained under normal conditionsMEASURING EFFECTIVENESS OF CAPACITY USECapacity utilizationPercentage measure of how well available capacity is being usedCAPACITY CONSIDERATIONSBest operating levelThe volume of output that results in the lowest average unit costEconomies of scaleA condition in which the average cost of a unit produced is reduce as the amount of output is increasedDiseconomies of scaleA condition in which the cost of each additional unit made increasesAverage cost per unit0SmallplantMedium plantLargeplantOutput rateBest operating levels as functions of facility sizeCAPACITY CONSIDERATIONSAlternative 1:Purchase one large facility, requiring one large initial investmentAlternative 2:Add capacity incrementally in smaller chunks as neededCAPACITY CONSIDERATIONSFocused factoriesFacilities that are small, specialized, and focused on a narrow set of objectivesEconomies of scaleA condition in which the average cost of a unit produced is reduce as the amount of output is increasedDiseconomies of scaleA condition in which the cost of each additional unit made increasesMAKING CAPACITY PLANNING DECISIONSStep 1: Identify capacity requirementsStep 2: Develop capacity alternativesStep 3:Evaluate capacity alternativesStep 1: Identify capacity requirementsForecasting CapacityCapacity CushionStrategic ImplicationsMAKING CAPACITY PLANNING DECISIONSCapacity cushion- additional capacity added to regular capacity requirements to provide Step 2: Develop Capacity AlternativesCapacity alternatives:

1. Do nothing.2. Expand large now.3. Expand small now, with option to add later.MAKING CAPACITY PLANNING DECISIONSStep 3: Develop Capacity AlternativesDECISION TREESDecision treeModeling tool used to evaluate independent decisions that must be made in sequence.DECISION TREESDecision trees contain the following information:Decision pointsDecision alternativesChance eventsoutcomesDECISION TREESProcedure for drawing a decision treeDraw a decision tree from left to right. Use squares to indicate decisions and circles to indicate chance events.Write the probability of each chance event in parentheses.Write out the outcome for each alternative in the right margin.DECISION TREESDecision trees contain the following information:Decision pointsDecision alternativesChance eventsOutcomesExpected value (EV)- a weighted average of chance events, where each chance event is given a probability of occurrenceDECISION TREESProcedure for solving a decision treeWork from right to left. At each circle representing chance events, compute the expected value.Write the EVs below each cirle.Select the alternative with the highest EV.LOCATION ANALYSISLocation analysisTechniques for determining location decisionsFacility LocationDetermining the best geographic location for a companys facilityLOCATION ANALYSISProximity to sources of supplyProximity to customersProximity to source of laborCommunity considerationSite considerationsQuality-of-life issuesOther considerationsFactors affecting location decisionsLOCATION ANALYSISGLOBALIZATIONThe process of locating facilities around the worldLOCATION ANALYSISAdvantages of globalizationBenefits of foreign marketsReduction of trade barriersCheap laborLOCATION ANALYSISDisadvantages of globalizationLarge political risks, imposed laws/policiesNeed to share some proprietary technologyIssue on using local employeesLocal infrastructureLOCATION ANALYSISIssues to consider in locating globallyDifferent cultureLanguage barriersDifferent laws and regulationsMAKING LOCATION DECISIONSProcedure for making location decisionsStep 1: Identify dominant location factorsStep 2:Develop location alternativesStep 3:Evaluate location alternativesProcedures for evaluating location alternativesFactor ratinga procedure that can be used to evaluate multiple alternative locations based on a number of selected factorsMAKING LOCATION DECISIONSProcedure for evaluating location alternativesStep 1: Identify dominant factorsStep 2:Assign weights to factors reflecting the importance of each factor to the other factorsStep 3:Select a scale by which to evaluate each location relative to each factor.Step 4: Evaluate each alternative relative too each factor, using the scale selected in Step 3.Step 5:For each factor and each location, multiply the weight of the factor by the score for that factor and sum the results for each alternative.Step 6:Select the alternative with the highest score.MAKING LOCATION DECISIONSLoad-Distance ModelA procedure for evaluating location alternatives based on distance.Load-Distance ModelSteps:1. Identify distances.Rectilinear distance- the shortest distances between two points measured by using only north-south and east-west movements.2. Identify loads.3. Calculate the Load-Distance score for each location.MAKING LOCATION DECISIONSThe Center of Gravity ApproachMAKING LOCATION DECISIONSBreak-Even AnalysisTechnique used to compute the amount of goods that must be sold just to cover costs.Basic Break-even equations:Total cost = F + cQTotal revenue = pQ

Where:F= fixed costc= variable cost per unitQ= number of units soldp= price per unitSteps in using break-even analysis for location selection:

Step 1: For each location, determine fixed and variable costs.Step 2: Plot the total costs for each location on one graph.Step 3: Identify ranges of output for which each location has the lowest total cost.Step 4: Solve algebraically for the break-even points over the identified ranges.Source: Operations Management 6th EditionR. Dan ReidTHANK YOU.