Wk-3-slides - Facility Capacity and Location 1 Overview q q...

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Unformatted text preview: Facility Capacity and Location 1 Overview q q q q Facility Planning Long-Range Capacity Planning Facility Location Wrap-Up: What World-Class Companies Do 2 Facility Planning q q q q 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 WHAT should be should 3 Facility Planning q q The capital investment in land, buildings, technology, The and machinery is enormous and A firm must live with its facility planning decisions firm for a long time, and these decisions affect: for Operating efficiency Economy of scale Ease of scheduling Maintenance costs … Profitability! Profitability! q q q q q 4 Long-Range Capacity Planning 5 Steps in the Capacity Planning Process q q q q Estimate the capacity of the present facilities. Forecast the long-range future capacity needs. Identify and analyze sources of capacity to meet these Identify needs. needs. Select from among the alternative sources of Select capacity. capacity. 6 Definitions of Capacity q q In general, production capacity is the maximum In production production rate of an organization. production Capacity can be difficult to quantify due to … Day-to-day uncertainties such as employee Day-to-day absences, equipment breakdowns, and materialabsences, delivery delays Products and services differ in production rates (so Products product mix is a factor) product Different interpretations of maximum capacity q q q 7 Definitions of Capacity q The Federal Reserve Board defines sustainable practical capacity as the greatest level of output that a practical plant can maintain … plant within the framework of a realistic work schedule taking account of normal downtime assuming sufficient availability of inputs to assuming operate the machinery and equipment in place operate q q q 8 Measurements of Capacity Output Rate Capacity For a facility having a single product or a few For homogeneous products, the unit of measure is straightforward (barrels of beer per month) straightforward For a facility having a diverse mix of products, an For aggregate unit of capacity must be established aggregate using a common unit of output (sales dollars per week) week) q q 9 Measurements of Capacity Input Rate Capacity Commonly used for service operations where Commonly output measures are particularly difficult output Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month q q q q 10 Measurements of Capacity Capacity Utilization Percentage Relates actual output to output capacity Example: Actual automobiles produced in a Example: quarter divided by the quarterly automobile production capacity production Relates actual input used to input capacity Example: Actual accountant hours used in a Example: month divided by the monthly account-hours available available q q q q 11 Measurements of Capacity Capacity Cushion an additional amount of capacity added onto the an expected demand to allow for: expected greater than expected demand demand during peak demand seasons lower production costs product and volume flexibility improved quality of products and services q q q q q q 12 Forecasting Capacity Demand Forecasting q q q q q 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 13 Other Considerations q q q q Resource availability Accuracy of the long-range forecast Capacity cushion Changes in competitive environment 14 Expansion of Long-Term Capacity q q q q q 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 15 Reduction of Long-Term Capacity q q q Sell off existing resources, lay off employees Mothball facilities, transfer employees Develop and phase in new products/services 16 Economies of Scale q q q Best operating level - least average unit cost Economies of scale - average cost per unit decreases as the volume increases toward the best operating level level Diseconomies of scale - average cost per unit increases as the volume increases beyond the best operating level operating 17 Economies and Diseconomies of Scale Average Unit Cost of Output ($) Economies of Scale Diseconomies of Scale Best Operating Level Annual Volume (units) 18 Economies of Scale q Declining costs result from: Fixed costs being spread over more and more units Longer production runs result in a smaller Longer proportion of labor being allocated to setups proportion Proportionally less material scrap … and other economies and q q q q 19 Diseconomies of Scale q Increasing costs result from increased congestion of Increasing workers and material, which contributes to: workers Increasing inefficiency Difficulty in scheduling Damaged goods Reduced morale Increased use of overtime … and other diseconomies and q q q q q q 20 Two General Approaches Two to Expanding Long-Range Capacity to q q All at Once – build the ultimate facility now and grow into it grow Incrementally – build incrementally as capacity demand grows demand 21 Two General Approaches Two to Expanding Long-Range Capacity to q All at Once Little risk of having to turn down business due to Little inadequate capacity inadequate Less interruption of production One large construction project costs less than One several smaller projects several Due to inflation, construction costs will be higher Due in the future in Most appropriate for mature products with stable Most demand demand q q q q q 22 Two General Approaches Two to Expanding Long-Range Capacity to q Incrementally Less risky if forecast needs do not materialize Funds that could be used for other types of Funds investments will not be tied up in excess capacity investments More appropriate for new products q q q 23 Subcontractor Networks A viable alternative to larger-capacity facilities is to viable develop subcontractor and supplier networks. develop “Farming out” or outsourcing your capacity needs Farming to your suppliers to Developing long-range relationships with suppliers Developing of parts, components, and subassemblies of Relying less on backward vertical integration Requiring less capital for production facilities More easily varying capacity during slack or peak More demand periods demand q q q q q 24 Outsourcing Service Functions q q q q q q q q q Building maintenance Data processing Delivery Payroll Bookkeeping Customer service Mailroom Benefits administration … and more and 25 Economies of Scope q q q The ability to produce many product models in one The flexible facility more cheaply than in separate facilities facilities Highly flexible and programmable automation allows Highly quick, inexpensive product-to-product changes quick, Economies are created by spreading the automation Economies cost over many products cost 26 Analyzing Capacity-Planning Decisions q q q q q q Break-Even Analysis Present-Value Analysis Computer Simulation Computer Waiting Line Analysis Linear Programming Linear Decision Tree Analysis 27 Example: King Publishing q Break-Even Analysis King Publishing intends to publish a book in King residential landscaping. Fixed costs are $125,000 per year, variable costs per unit are $32, and selling price per unit is $42. per A) How many units must be sold per year to A) 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? if 28 Example: King Publishing Break-Even Analysis A) How many units must be sold per year to break even? q Q = FC/(p-v) = $125,000/(42 – 32) = 12,500 books 29 Example: King Publishing Break-Even Analysis B) How much annual revenue is required to break even? q TR = pQ = 42(12,500) = $525,000 TR 30 Example: King Publishing Break-Even Analysis C) If annual sales are 20,000 units, what are the annual C) profits? profits? q P = pQ – (FC + vQ) pQ = 42(20,000) – [125,000 + 32(20,000)] 42(20,000) = 840,000 – 125,000 – 640,000 840,000 = $75,000 $75,000 31 Example: King Publishing Break-Even Analysis D) What variable cost per unit would result in $100,000 D) annual profits if annual sales are 20,000 units? annual q P = pQ – (FC + vQ) pQ 100,000 = 42(20,000) – [125,000 + v(20,000)] 100,000 100,000 = 840,000 – 125,000 – 20,000v 100,000 20,000v = 615,000 20,000v v = $30.75 $30.75 32 Decision Tree Analysis q 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 q q q q q q 33 Example: Good Eats Café q 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. 34 Example: Good Eats Café q Payoff Table Average Number of Customers Per Hour Average c1 = 80 c2 = 100 c3 = 120 Design A Design Design B Design Design C Design $10,000 $ 8,000 $ 6,000 $15,000 $18,000 $16,000 $14,000 $12,000 $21,000 35 Example: Good Eats Café Expected Value Approach Expected Calculate the expected value for each decision. Calculate The decision tree on the next slide can assist in this calculation. Here d1, d2, d3 represent the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur. 120) q 36 Example: Good Eats Café q Payoffs Decision Tree Decision c1 2 d1 1 c2 c3 (.2) (.4) c1 d2 d3 (.4) 3 4 (.4) c2 c3 (.2) c1 c2 c3 (.4) (.4) (.2) (.4) 10,000 15,000 14,000 8,000 18,000 12,000 6,000 16,000 21,000 37 Example: Good Eats Café Example: q Expected Value For Each Decision EV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600 $12,600 d1 2 d2 EV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600 $11,600 Design A 1 Design B Design C 3 d3 EV = .4(6,000) + .2(16,000) + .4(21,000) = $14,000 $14,000 4 Choose the design with largest EV -- Design C. 38 Facility Location 39 A Sequence of Decisions National Decision Political, social, economic stability; Currency exchange rates; . . . . . Regional Decision Climate; Customer concentrations; Degree of unionization; . . . . . Community Decision Transportation system availability; Preference of management; . . . . . Site Decision Site size/cost; Environmental impact; Zoning restrictions; . . . . . 40 Factors Affecting Factors the Location Decision the q Economic Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes q q q q q 41 Factors Affecting Factors the Location Decision the q 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 q q q q q q 42 Facility Types and Their Dominant Locational Factors q 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 q q q q q q q q q 43 Facility Types and Their Dominant Locational Factors q 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 q q q q q q 44 Some Reasons the Some Facility Location Decision Arises Facility q Changes in the market Expansion Contraction Geographic shift Changes in inputs Labor skills and/or costs Materials costs and/or availability Utility costs . . . more more q q q q q q q q 45 Some Reasons the Some Facility Location Decision Arises Facility q Changes in the environment Regulations and laws Attitude of the community Changes in technology q q q 46 Analyzing Service Location Decisions Consumer Behavior Research Market Research Why do customers buy our products and services? Who are our customers? What are their characteristics? Data Gathering for Where are our customers concentrated? Data Each Location Alternative What are their traffic/spending patterns? Each Revenue Projections for What are the economic projections? Each Location Alternative What is the time-phased revenue? Profit Projections for What are the projected revenues Each Location Alternative less time-phased operating costs? 47 Analyzing Industrial Facility Locations Factors that tend to dominate the industrial-facility Factors location decision are: location Transportation costs Labor cost and availability Materials cost and availability Utilities cost q q q q 48 Analyzing Industrial Facility Locations q Locating a Single Facility A simple way to analyze alternative locations is simple conventional cost analysis conventional Pros – ease of communication and understanding Cons – time value of money ignored and Cons qualitative factors not considered Locating Multiple Facilities More sophisticated techniques are often used: Linear programming, computer simulation, Linear network analysis, and others network q q q q q q 49 Qualitative Factors in Location Decisions Often-important qualitative factors include Housing Climate Community activities Education and health services Recreation Churches Union activities Community attitudes q q q q q q q q 50 Integrating Qualitative & Quantitative Factors q q q Managers often wrestle with the task of trading off Managers qualitative factors against quantitative ones qualitative Methods for systematically displaying the relative Methods advantages and disadvantages, both qualitative and quantitative, of each location alternative have been developed developed The relative-aggregate-scores approach is one such The relative-aggregate-scores method method 51 Relative-Aggregate-Scores Approach Quantitative and Qualitative Factors Factor Score Score Location A Location B Location Location Econ. Wgt. Econ. Wgt. Econ. Weight Data Score Score Data Score Prod.cost/ton Transp.cost/ton Labor Avail. Union Activity Total Score .45 .35 .15 .05 $65 .923 $18 1.000 .700 .450 .415 .350 .105 .023 .893 $60 1.000 $21 .857 .500 .750 .450 .300 .075 .038 .863 52 Wrap-Up: World-Class Practice q Outstanding long-range business plans Long-range capacity studies Justify investment on how it positions their company Justify to capture market share to Facility location decisions involve worldwide search Facility for sites q q q 53 54 ...
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