Chapter 9: Capacity Planning and Facility Location
This chapter defines capacity planning and location analysis and explains the steps and factors considered when making these types of decisions. The relationship between capacity planning and location analysis is described. The use of decision support tools for capacity planning and location analysis is described.
Answers to Discussion Questions in Textbook
Having the wrong level of capacity causes negative effects. Too much capacity means that are costs are higher than they should be since we are paying for more land, equipment and a larger building than we need. Not enough capacity negatively affects the level of service provided to our customers.
Design capacity is the maximum output that can be achieved using temporary measures, such as overtime and subcontracting. Effective capacity is the maximum output that can be achieved under normal conditions, including realistic work schedules and regular staff levels. Effective capacity is usually less than design capacity. Effective capacity is what we can achieve over long periods of time, while design capacity can be reached on a short-term basis.
Capacity utilization is the actual output divided by the capacity times 100%. It tells us what percentage of our capacity is being used.
The steps in capacity planning are to identify the capacity requirements for the present and future, develop capacity alternatives and evaluate capacity alternatives. The capacity alternatives are do nothing, expand large now and expand small now with the option to increase capacity later. We evaluate the capacity alternatives by determining the predicted impacts on costs, profit and customer service.
A decision tree is a tool for determining the predicted effect of decisions given the uncertainties of the outcomes related to each decision. They help us make better decisions since they provide a structured, logical process for evaluating the expected outcome given the probabilities of different outcomes.
Overcapacity typically occurs when a university builds a new business school building. This is because we would not want to construct the building to provide just enough offices for the current level of faculty. We would build extra offices to prepare for an increase in faculty in the future.
Undercapacity occurs at universities when they have to keep increasing the class sizes since they do not have either enough faculty or classrooms to support the current number of students.
A poor location decision in the service industry affects the level of demand since customers usually go to the facility to be served. A facility that is not close to or part of a heavily populated area may not have a high level of demand. There are limits to how far customers will travel to obtain various types of services. A poor location decision with respect to proximity to the source of labor could cause us to have difficulty staffing the facility. The location decision also affects our cost structure.
It is good for restaurants to locate close to popular shopping areas, given the traffic volume and time spent there by customers which could cause them to decide to eat there as well. A wood furniture manufacturer has made a bad location decision if the plant was located far from the lumber suppliers since it is expensive to transport the lumber.
The advantages of globalization are the ability to take advantage of foreign markets, the availability of cheap labor and the reduction of trade barriers. The ability to take advantage of foreign markets is the increased potential for obtaining new customers since there are now more countries to sell in. The availability of cheap labor can help us reduce our costs. The reduction of trade barriers makes it easier and cheaper to import products into other countries for sale, without opening a plant there.
The disadvantages of globalization are the risk of losing proprietary technology, poor infrastructure, and different worker attitudes. The risk of losing proprietary technology occurs because some countries do not regulate the use of this technology. Poor infrastructure can cause problems regarding reliable transport of goods. Different worker attitudes can affect tardiness, absenteeism and productivity.
The steps for making location decisions are identify the location criteria, develop location alternatives and evaluate location alternatives. The location criteria are the factors we want to consider when making the decision. We develop location alternatives by selecting potential locations that meet our criteria. Then we evaluate the location alternatives by evaluating the ability of the locations to satisfy our criteria overall.
The five factors that should be considered in the location decision are transportation, community attitude, and proximity to customers, labor and sources of supply. Transportation is the cost of moving items to and/or from the location. Community attitude relates to the community’s support of the facility in terms of lowering expenses to encourage it to open there and the level of desire to have the facility there. Proximity to customers affects demand for services and transportation costs for manufacturers. Proximity to source of labor affects the ability to find staff for the facility. Proximity to sources of supply affects the transportation costs. Service and manufacturing firms may place different levels of importance on each of these factors.
Factor rating determines the weighted summed score for each location based on the rating of the ability of each location to meet the factor criteria. The load-distance model measures the frequency of movements over distance to determine which alternative minimizes travel costs. Break-even analysis determines the level of demand needed to cover all the costs. Factor rating can consider a variety of factors, while the load-distance model only considers travel costs. Break-even analysis only considers costs and demand.
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