chapter 2€¦ · web view · 2003-07-01facility capacity, location, and layout. long-range...

CHAPTER 5CHAPTER 5

Facility Capacity,Location, and Layout

Long-Range Capacity

Facility Location

Manufacturing Facility Layouts

Analyzing Manufacturing Facility Layouts

Service Facility Layouts

64 CHAPTER 5

REVIEWs

CAPACITY PLANNING

Facility planning includes:1. determining how much long-range production capacity is needed2. determining when additional capacity is needed3. determining where the production facilities should be located4. determining the layout and characteristics of the facilities

Reasons why facility-planning decisions are crucial to a company:1. the capital investment is enormous2. the long-range strategies are embodied in a firm's facility plans3. the operating efficiency of operations is dependent on the capacity of the facilities

Four activities involved in capacity planning decisions:1. estimating the capacities of the present facilities 2. forecasting the long-range future capacity needs for all products and services3. identifying and analyzing sources of capacity to meet future capacity needs4. selecting from among the alternative sources of capacity.

Definition of "production capacity" and "sustainable practical capacity":1. production capacity -- the maximum production rate of an organization2. sustainable practical capacity -- that output attained within the normal operating

schedule of shifts per day and days per week without bringing in high cost inefficient facilities

Factors that make planning for future capacity needs difficult to do:1. fundamental changes in the economy2. changes in consumer preferences3. technological developments4. demographic shifts5. changes in government regulations6. political and military events

Four steps in forecasting production capacity:1. the total demand for a particular product or service from all producers is estimated2. the market share for a single company is estimated3. the market share is multiplied times the total demand to obtain estimated demand for a

single company4. product or service demand is translated into capacity needs

A capacity cushion provides:1. extra capacity in case more demand than expected occurs2. the ability to satisfy demand during peak demand seasons3. lower production costs

FACILITY CAPACITY, LOCATION, and LAYOUT 65

4. product and volume flexibility5. improved quality of products and services

The concept of "time-phasing" of products is:1. a strategy that can be used to maintain high facility utilization2. as one product enters the declining phase of its life-cycle, a new product is developed

to use the capacity made available by the older product's decline.

Ways to expand long-range capacity:1. subcontract with other companies2. acquire other companies, facilities, or resources3. develop sites, build buildings, buy equipment4. expand, update, or modify existing facilities5. reactivate facilities on standby status

Ways to reduce long-range capacity:1. sell off existing facilities, sell inventories, and lay off or transfer employees2. mothball facilities and place on standby status, sell inventories, and lay off or transfer

employees 3. develop and phase in new products as other products decline

Concept of “economies of scale”:1. as the volume of outputs in a facility increases to the best operating level, the average

unit costs fall2. this is because fixed costs are spread across more and more units

Concept of “best operating level”:1. the volume of outputs in a facility where the least average unit cost occurs

Concept of “diseconomies of scale”:1. As the volume of outputs in a facility increases beyond the best operating level,

average unit costs rise2. this is because of increased congestion of materials and workers

Two general approaches to expanding long-range capacity:1. invest heavily in one large facility that requires a large initial investment, but one that

has a higher best operating level and that ultimately will fulfill the capacity needs of the firm (build now and grow into it)

2. plan to invest in an initial facility design now and expand or modify that facility as needed to raise the best operating levels to meet the long range demand for products and services (expand incrementally as needed)

Concept of “subcontractor networks”:1. parent manufacturer develops long-range contractual relationships with

suppliers of parts, components, and assemblies2. this allows parent manufacturer to operate with less capacity within its own

facilities3. this requires less capital of the parent manufacturer for production facilities

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4. this allows parent manufacturer to more easily vary capacity during peak or slack periods of demand

5. disadvantage is parent manufacturer can become vulnerable to subcontractors’ capacity shortages

Concept of "outsourcing service functions":1. another way that companies can increase their capacity to run their business as their

demand grows2. current functions include janitorial/building maintenance, temporary staffing, travel

arrangements, desktop computer supply/maintenance, information system maintenance, moving/storage, delivery, advertising, and payroll

3. future functions include: customer service, bookkeeping, telemarketing, mailroom, product design, data processing, sales representation, and benefits administration

Concept of "economies of scope":1. the ability to produce many product models in one highly flexible production facility

more cheaply than in separate production facilities2. programmable automation allows production systems to change to other products

quickly and inexpensively3. cost of automated facility is spread over many product lines

Major benefits of using decision tree analysis for capacity planning decisions:1. a way of structuring complex multiphase decisions by mapping decisions from the

present to the future2. a direct way of dealing with uncertain events3. an objective way to determine the relative value of each decision alternative

FACILITY LOCATION

Sequence of decisions that typically take place when a manufacturing facility location is being selected:

1. national decision -- whether the facility will be located internationally or domestically2. regional decision -- which particular region within a given country or nation3. community decision -- which community in the region4. site selection -- the specific location

Major factors in making a regional facility location decision:1. customer or constituent concentrations and trends2. labor availability and costs3. degree of unionization4. construction and land costs5. utilities supply and costs6. transportation system availability7. transportation costs8. materials and supplies availability and costs9. climate

10. government incentives11. environmental regulations

Additional factors involved in facility location decisions:


1. data2. politics3. incentives 4. preemptive tactics

Dominant factors affecting location decisions:1. proximity to concentration of customers or constituents2. labor availability and costs3. attractiveness of community for recruiting professionals4. degree of unionization5. construction and land costs6. proximity to transportation facilities7. incoming transportation costs8. outgoing transportation costs9. utilities availability and costs

10. proximity to raw materials and supplies11. zoning restrictions and environmental impact

Five steps in analyzing service facility location decisions:1. consumer behavior research2. market research3. data gathering for each location alternative4. revenue projections for each location alternative5. profit projections for each location alternative

Qualitative factors that must be considered in facility location decisions:1. housing 2. cost of living 3. availability of labor 4. climate5. community activities6. education and health services7. recreation8. churches9. union activities

10. local transportation systems 11. proximity of similar industrial facilities12. community attitudes

FACILITY LAYOUT

Facility layout includes:1. planning for the location of all machines, utilities, employee workstations, customer

service areas, material storage areas, aisles, restrooms, lunchrooms, drinking fountains, internal walls, offices and computer rooms

2. planning for the flow patterns of materials and people around, into, and within buildings

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Central focus of most manufacturing facility layouts:1. to minimize the cost of processing, transporting, and storing materials throughout

the production system

A materials-handling system is:1. the entire network of material transportation2. it receives materials3. it stores materials in inventories4. it moves materials about between processing points within and between buildings5. it finally deposits the finished products into vehicles that will deliver them to

customers

Objectives for manufacturing operation layouts:1. provide enough production capacity2. reduce materials-handling costs3. conform to site and building constraints4. allow space for production machines5. allow high labor, machine, and space utilization and productivity6. provide for volume and product flexibility7. provide space for restrooms, cafeterias, and other personal-care needs of

employees8. provide for employee safety and health9. allow for ease of supervision

10. allow for ease of maintenance11. achieve objectives with least capital investment

Seven principles of materials-handling:1. materials should move in direct flow patterns, minimizing zigzagging or backtracking2. related production processes should be arranged to provide for direct material flows3. mechanical materials-handling devices should be designed and located and storage

locations selected so that human effort is minimized4. heavy or bulky materials should be moved the shortest distance5. the number of times each material is moved should be minimized6. systems flexibility should allow for unexpected situations 7. mobile equipment should carry full loads at all times

Some types of materials-handling equipment:1. automatic transfer devices2. containers and manual devices3. conveyors4. cranes5. elevators6. pipelines7. turntables8. trucks9. automated guided vehicle systems


Four basic types of manufacturing layouts:1. process layout -- for producing a variety of custom products in relatively small

batches2. product layout -- for producing a few standardized products in relatively large

quantities3. cellular manufacturing layout -- machines are grouped into cells, and the cells

function somewhat like a product layout island within a larger process layout4. fixed-position layout -- for working on a product that is very bulky, large, heavy, or

fragile with workers, materials, and machines transported to and from the productDifferences in machines between process and product layouts:

1. process layouts -- typically use general-purpose machines that can be changed over rapidly to new operations for different product designs

2. product layouts -- typically use specialized machines that are set up once to perform a specific operation for a long period of time on one product

Nature of manufacturing cells:1. most applications are in metalworking production2. cells are usually formed by taking production of parts from an existing job shop3. the percentage of parts produced in cells is a relatively small percentage of the total

production4. both small and large firms use manufacturing cells5. moderate batch sizes of parts are produced in cells6. the number of cells is relatively small7. the number of production machines per cell is relatively small8. there are relatively few workers within cells

Potential benefits from using a cellular manufacturing layout:1. machine changeovers are simplified2. training periods for workers are shortened3. materials-handling costs are reduced4. parts can be made faster and shipped more quickly5. less in-process inventory is required6. production is easier to automate

Trends in modern manufacturing layouts:1. cellular manufacturing layouts within larger process layouts2. automated materials-handling equipment3. U-shaped production lines4. more open work areas5. smaller and more compact factory layouts6. less space provided for storage of inventories

Modern U.S. approach to manufacturing layout:1. designed for product quality and flexibility2. ability to quickly modify production rates and to quickly change to different product

models3. tend to have relatively small floor plans, compact and tightly packed layouts4. large percentage of floor space used for production5. less floor space occupied by inventory or materials handling devices

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6. U-shaped production lines

Traditional U.S. approach to manufacturing layout:1. designed for high machine and worker utilization2. tend to have very large floor plans and generally underutilized floor space3. extensive areas reserved for inventory4. much space for long conveyors and other material-handling devices5. large production machines requiring much floor space6. L-shaped or linear production lines

Two categories of software tools most helpful in analyzing facility layouts:1. computer aided design (CAD)2. computer simulation

Computer aided design software:1. allows 3D views of facility designs in full color2. some allow virtual walk-through to obtain a realistic sense of a new facility design3. common CAD packages are: AutoSketch, AutoCAD Architectural Desktop, S8

Architectural and Building Design Software, and ArchiCad

Computer simulation software:1. equipment layouts and product flows can easily be developed2. then manufacturing operation can be simulated and the performance of the production

system can be recorded3. potential changes in machine locations, product routings, number of workers, and

storage locations can be easily evaluated4. common simulation packages are: SIMPROCESS, ProModel, and VisFactory5. Visfactory uses 256 algorithms to find the optimal layout

Analyzing warehouse layouts:1. usually designed for fast storage and retrieval of inventory items and efficient use of

space2. must be designed around the type of material handling equipment to be used (forklifts

require wide aisles; shelves can be tall if automated storage/retrieval equipment is used)

3. quality inspection areas for materials would be located near the receiving docks to minimize the travel of materials

4. warehouse management software can help with inventory location decisions

Line balancing:1. the analysis of production lines that nearly equally divides the work to be done among

workstations so that the number of workstations required is minimized2. the goal is to determine how many workstations to have and which tasks to assign to

each workstation so that the minimum number of workers and the minimum amount of machines are used to provide the required capacity

Seven steps in the line balancing procedure:1. determine which tasks must be performed to complete one unit of a particular

product


2. determine the order or sequence in which tasks must be performed3. draw a precedence diagram4. estimate task times5. calculate the cycle time6. calculate the minimum number of workstations7. use one of the heuristics to assign tasks to workstations so that the production line

is balanced

Appropriateness of the incremental utilization and the longest task-time heuristics:1. incremental utilization -- when one or more task times is equal to or greater than the

cycle time2. longest-task-time -- when each and every task time is less than or equal to the cycle

time, and when the primary focus of the analysis of production lines is minimizing the number of workstations and the amount of tools and equipment required

Four steps involved in using the longest-task time heuristic:1. let I = 1, where i is the number of the workstation being formed2. make a list of all tasks that are candidates for assignment to this workstation (must

satisfy three conditions); if no candidates can be found, go to step 43. assign the task from the list with the longest task time to the workstation4. close the assignment of tasks to workstation i; if there are no more tasks on the

candidate list but still tasks to be assigned, let i = I + 1 and go to step 2; if there are no more tasks to assign, the procedure is complete

Some issues involved with line balancing:1. workers must be in control and not under the control of machines2. the relationship between cycle time and the number of workstations3. varying cycle time can have important results4. rebalancing a production line is a common occurrence

Two fundamental requirements of parts to be made in cells:1. the demand for the parts must be high enough and stable enough that moderate batch

sizes of the parts can be produced periodically2. the parts being considered must be capable of being grouped into parts families; within

a parts family, the parts must have similar physical characteristics and thus require similar production operations

Common features of service facility layouts:1. provide for easy entrance to the properties from freeways and thoroughfares2. large, amply lighted parking areas with wide walkways leading to buildings3. well marked, high-capacity entryways and exits4. powered doors and escalators5. lobbies or other receiving/holding areas for customers6. services counters, employee workstations, merchandise displays, and many aisle ways

Two extremes in service facility layouts:

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1. front-room operations – where entire layout must be designed around customers (customer-as-participant or customer-as-product)

2. back-room operations – where the layout must be designed only for physical materials processing and production efficiency (quasi-manufacturing)

Some quantifiable objectives in service facility layout:1. minimize the total travel distance among departments2. minimize the total cost of material handling among departments3. minimize the sum of pairs of closeness ratings

Steps in the procedure for using closeness ratings:1. set m = 1 and n = 62. identify pairs of departments with closeness ratings of m 3. develop a trial layout with the pairs of departments identified in Step 2 adjacent to one

another4. identify pairs of departments with closeness ratings of n5. fit the pairs of departments in Step 4 into the trial layout from Step 36. examine the trial layout in Step 5; if any ratings of pairs of departments are violated,

rearrange department to comply with the ratings7. if m = 3 and n = 4 then quit; otherwise set m = m + l and n = n - 1 and go to Step 2

KEY TERMSs Aggregate unit of capacity Fixed position layoutBest operating level Hybrid layoutCapacity cushion Input rate capacityDecision tree analysis Line balancingDiseconomies of scale Material-handling systemEconomies of scale Maximum practical capacityEconomies of scope Percentage capacity utilizationExpected value Process layoutFacility layout Product layoutFacility planning Subcontractor network

1. The determination of how much long-range production capacity is needed, when it is needed, where production facilities should be located, and the layout and characteristics of the facilities is ____________________.

2. A ____________________ is an arrangement in which a manufacturer develops long-range contractual relationships with several suppliers of parts, components, and subassemblies.

3. The ability to produce many product models in one highly flexible production facility more cheaply than in separate production facilities is ____________________.


4. A measure that relates output measure to inputs available is ____________________.

5. ____________________ is a graphic aid in making multiphase decisions that shows the sequence and interdependence of decisions.

6. A measure that allows rates of various outputs to be converted to a common unit of output measure is ____________________.

7. An increase in unit cost caused by additional volume of outputs past the point of best operating level for a facility is known as ____________________.

8. ____________________ is additional production capacity added to expected demand to cope with unexpected changes in demand, as well as to lower production costs and increase product/volume flexibility and product/service quality.

9. ____________________ is the level at which the annual volume of outputs results in the least average unit cost.

10. The relative measure of value representing the value of a particular outcome and the probability that it will occur is ____________________.

11. ____________________ is a measure that allows rates of various inputs to be converted to a common unit of input measure.

12. Reduction in unit cost as fixed costs are spread over increasingly more units can be attributed to ____________________.

13. ____________________ is the output attained within the normal operating schedule of shifts per day and days per week while bringing in high-cost inefficient facilities.

14. A ____________________ is a layout designed to accommodate only a few product designs.

15. A plan for the location of all machines and utilities and for the physical arrangement within facilities of all manufacturing processes and their support functions is known as a ____________________.

16. A ____________________ is a layout that uses a combination of layout types, such as an assembly line combined with a process layout.

17. A transportation network that receives, stores, moves, and delivers materials within a production facility is a ____________________.

18. A layout for the production of a variety of nonstandard products in relatively small batches is a ____________________.

19. A layout that locates the product in a fixed position and transports workers, materials, machines, and subcontractors to and from the product is a ____________________.

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20. ____________________ is a phase of assembly line study that nearly equally divides the work to be done among the workers so that the total number of employees required on the assembly line is minimized.

TRUE/FALSEs ___ 1. The phasing-in of new products to replace older and declining products is one way of

expanding capacity.

___ 2. Decision tree analysis is not useful unless probabilities and expected values are known.

___ 3. Capital-intensive firms generally are located near their sources of supply.

___ 4. An aggregate unit of capacity must be established for firms producing a single product or a few homogeneous ones.

___ 5. All things being equal, facilities with higher best operating levels require greater investments.

___ 6. The incremental approach to expanding capacity is risky because the funds could be committed to other types of investments that would be generating revenues.

___ 7. Expected value as a decision criterion is more meaningful when a decision isrecurring.

___ 8. Facility layout planning involves layouts of only areas where products/services areactually produced.

___ 9. The main objective of facility layouts is to allow high labor, machine, and spaceutilization and productivity.

___ 10. The design and layout of buildings must be integrated with the design of thematerials-handling system.

___ 11. Product layouts typically use specialized machines, thereby accommodating only aminimum number of product and process designs.

___ 12. A fixed position layout minimizes movement of materials-handling machines.

___ 13. Modern facility layouts are designed for manufacturing flexibility and the ability to shift to different production models or different production rates quickly.


___ 14. In a quasi-manufacturing service operation, the facility layout is designed around the customer, with emphasis on providing convenient parking, easy access to buildings from the parking area, and convenient and comfortable waiting areas.

___ 15. If two parts require the same machines for production, this is a good indication thatthey have similar production operations and therefore are good candidates for cellular manufacturing.

MULTIPLE CHOICEs ___ 1. Which of the following is a factor that affects location decisions at the national,

regional, community, and site levels?a. climateb. labor availabilityc. environmental impactd. availability of and proximity to transportation systems

___ 2. Which of the following is NOT an approach used to analyze capacity-planning decisions?a. break-even analysisb. internal rate of returnc. computer simulationd. present value analysis

___ 3. Long-range capacity and facility location decisions are crucial for all the following reasons EXCEPT:a. long-range strategies are embodied in a firm's facility plansb. capital investment in buildings and equipment is enormousc. the capacity of facilities becomes a constraint on many POM decisionsd. a facility's capacity delineates the product lines that can be produced in each

time period

___ 4. The measure that relates output measures to the inputs available is:a. output rate capacityb. aggregate unit of capacityc. percentage of capacity utilizationd. maximum practical capacity

___ 5. Which of the following is NOT a capacity expansion technique?a. acquiring other companies' facilities or resourcesb. reactivating facilities on standby statusc. expanding, updating, or modifying existing facilitiesd. developing and phasing in new products as other products decline

___ 6. Which of the following would NOT be considered as diseconomies of scale?a. decreasing use of overtime

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b. increasing congestion of materials and workersc. difficulty in schedulingd. reduced morale


___ 7. Which of the following is a disadvantage to investing heavily in one large facility to achieve a higher best operating level?a. involves more investment and costs than several smaller projectsb. risk of having to turn away business due to interruption of production for an

extended period of timec. current construction and interest costs might be higher than at some point in the

futured. funds will be tied up in excess capacity on which no return will be realized for

several years

___ 8. Which of the following is NOT an activity involved in capacity planning decisions?a. estimating the capacities of the present facilitiesb. setting the operating efficiency of production operationsc. predicting the long-range future capacity needs for all products and servicesd. identifying alternative sources of capacity to meet future capacity needs

___ 9. Which of the following is NOT a factor affecting long-term demand for products and services?a. changes in consumer preferencesb. demographic shiftsc. time value of moneyd. changes in government regulations

___ 10. Which of the following is of the LEAST importance in locating a heavy manufacturing

operation?a. proximity to raw materials and suppliesb. degree of unionizationc. zoning restrictions and environmental impactd. proximity to concentrations of customers

___ 11. Which one of the following is NOT a step in analyzing retailing facility location decisions?a. cost projections for each location alternativeb. market researchc. revenue projections for each location alternatived. consumer behavior research

___ 12. Which of the following is NOT a factor affecting site selection decisions?a. utilities availableb. zoning restrictionsc. degree of unionizationd. environmental impact

___ 13. The dominant factors affecting the location of warehouse facilities are:a. availability of utilitiesb. availability of labor and degree of unionizationc. incoming and outgoing transportation costsd. proximity to suppliers

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___ 14. Which of the following is NOT a decision in facility planning?a. when additional capacity is neededb. where production facilities should be locatedc. what layout should be usedd. what processes should be utilized

___ 15. Declining costs resulting from fixed costs being spread over increasingly more units

are a result of:a. economies of scopeb. diseconomies of scalec. economies of scaled. maximum practical capacity

___ 16. Which of the following is NOT an advantage that decision trees offer managers?a. a direct way of dealing with uncertain eventsb. a way of structuring complex multiphase decisions by mapping decisions from

the present to the futurec. a way of determining the absolute value of each decision alternatived. a way to clearly see in what sequence the decisions occur

___ 17. Which of the following approaches place quantitative and qualitative factors on the same scale, developing a weighted score for each location alternative?a. relative-aggregate-scores approachb. linear programmingc. network analysisd. decision tree analysis

___ 18. What is an important objective that subcontractor networks allow firms to achieve?a. manufacturing flexibilityb. workers trained at many jobsc. stable employmentd. high worker utilization

___ 19. Which of the following is NOT a type of facility layout?a. cellular manufacturingb. productc. processd. group technology

___ 20. Which of the following is NOT a characteristic of process layouts?a. workers must be highly skilledb. products are in the production system for relatively long periods of timec. can accommodate only one or two product designsd. machines are arranged according to the type of process being performed


___ 21. A layout designed to accommodate a variety of nonstandard products in relatively small batches is a:a. hybrid layoutb. process layoutc. cellular manufacturing layoutd. product layout

___ 22. A layout that typically uses specialized machines is a:a. hybrid layoutb. process layoutc. cellular manufacturing layoutd. product layout

___ 23. If a product were very large or bulky, which type of layout would be most suitable?a. process layoutb. fixed position layoutc. cellular manufacturing layoutd. product layout

___ 24. Which of the following does NOT characterize modern production facility layouts?a. inventory as a safeguard against machine breakdownsb. small machines that can be easily changed over to different product modelsc. workers trained at many jobsd. heavy investment in preventive maintenance

___ 25. A feature of modern layouts that is now being seen in many U.S. facilities is:

a. fully utilized, large production machinesb. long production runsc. U-shaped production linesd. workers trained at a limited number of tasks

___ 26. Which of the following is NOT considered an objective of a manufacturing layout?a. employee safety and healthb. privacy in work areasc. volume and product flexibilityd. reduced material-handling costs

___ 27. Which of the following is NOT a principle of materials handling?a. materials should flow through the facility in direct flow patternsb. heavy or bulky materials should be moved the shortest distance possiblec. mobile equipment should carry full loads at all timesd. human efforts should be maximized

___ 28. Which of the following is NOT an advantage of cellular manufacturing layouts?

a. high worker skills are not requiredb. less in-process inventory is requiredc. materials-handling costs are reducedd. production is easier to automate

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___ 29. If several parts cannot be cleanly divided between cells and an exceptional part must be selected, which of the following criteria would serve as a basis for this selection?a. the part uses the largest number of machines found together in a groupingb. the part can be entirely produced using only automated effortsc. all parts within its family are being produced in a celld. the part has the lowest cost of subcontracting (or of producing in the job shop)

___ 30. Which of the following service organizations would most likely have a layout similar to a process layout in manufacturing?a. fast food restaurantb. warehouse of a retail storec. hospitald. daycare center

KEY METHODSs

METHOD EXAMPLES EXERCISES

Capacity Planning

Decision Tree Analysis 1 1

Payback Period Approach 2 2

Facility Location

Breakeven Analysis 3 3

Relative-Aggregate-Scores Approach 4 4

Manufacturing Facility Layout

Line Balancing: Incremental Utilization Heuristic 5 5

Line Balancing: Longest-Task-Time Heuristic 6 6

Manufacturing Cell Formation 7 7

Service Facility Layout

Closeness Ratings Approach 8 8


EXAMPLESs

EXAMPLE 1

Decision Tree Analysis: Capacity Planning

A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line of air fresheners. The alternatives are to build a new plant, expand the old plant, or do nothing. The marketing department estimates a 35 percent probability of a market upturn, a 40 percent probability of a stable market, and a 25 percent probability of a market downturn. Georgia Swain, the firm's capital appropriations analyst, estimates the following annual returns for these alternatives:

MarketUpturn

StableMarket

MarketDownturn

Build new plant $690,000 $(130,000) $(150,000)Expand old plant 490,000 (45,000) (65,000)Do nothing 50,000 0 (20,000)

a. Use a decision tree analysis to analyze these decision alternatives.

b. What should the company do?

c. What returns will accrue to the company if your recommendation is followed?SOLUTION 1

a. Decision tree:

b. Decision: Build the new plant

Market Upturn

Stable Market

Market Downturn

Market Upturn

Stable Market

Market Downturn

$690,000

(130,000)

(150,000)

$690,000

(130,000)

(150,000)

$490,000

(45,000)

(65,000)

$490,000

(45,000)

(65,000)

$50,000

0

(20,000)

$50,000

0

(20,000)

Build New Plant

Expand Old Plant

Do Nothing

.35

.25

.40

.35

.25

.40

.35

.25

.40

.35

.25

.40

.35

.25

.40

.35

.25

.40

Market Upturn

Stable Market

Market Downturn

Market Upturn

Stable Market

Market Downturn

Market Upturn

Stable Market

Market Downturn

Market Upturn

Stable Market

Market Downturn

$152,000

$137,250

$12,500

|| ||

$152,000

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c. Returns to accrue: $690,000; ($130,000); or ($150,000)

EXAMPLE 2

Payback Period: Capacity Planning Decision

A local used-furniture firm, Hardly Used, wishes to locate its retail store near the state university due to the high student demand for its goods. A real estate broker has a suitable building near the university and has agreed to either sell the building outright or provide a 50-year lease agreement. Here is the information affecting the analysis:

Lease BuySalvage value -- 0Initial cost -- $100,000Economic life 50 years 50 yearsAnnual depreciation -- $2,000Annual lease payment $20,000 --Tax rate 40% 40%

If the after-tax payback period is less than six years, Hardly Used will buy the building; if it is greater than six years, it will lease the building. What should Hardly Used do?

SOLUTION 2

First, determine the after-tax savings from buying the building rather than leasing:

Before Tax After Tax Amount Amount

Annual depreciation tax savings $ 2,000 $ 800Annual lease payment savings 20,000 12,000

Total $12,800Next, compute the after-tax payback period for buying:

Payback Period = (First Cost)/(Annual After-Tax Savings) = (l00,000)/(12,800) = 7.81 years

This means that it would take almost 8 years to recover the $100,000 required to buy the building from after-tax savings. This payback is greater than the 6 years policy of the company; lease the new building.

EXAMPLE 3


Breakeven Analysis: Location Decision

William Green, vice president of manufacturing for Computer Products Corporation (CPC), and his staff are studying three Midwestern alternative locations for a new production facility for producing bar code scanners. His staff analysts predict that the scanners will be a growing market over the next ten years, and the analysis group shares marketing's enthusiasm for planning facilities for producing this new product line.

The analysts have developed these estimates for the three locations:

Annual Fixed Costs Variable CostLocation Alternative (Millions of Dollars) per Scanner

Cleveland, Ohio $3.9 $3,400South Bend, Indiana 3.6 3,700Grand Rapids, Michigan 3.1 4,000

The marketing department at CPC estimates sales for the bar code scanners will be 1,000 scanners in the first year, 2,000 in the second year, and 4,000 in the third year.

a. In what range of production capacity would each of the locations be preferred?

b. Use break-even analysis to determine which location would be preferred in Years 1, 2, and 3. Which single location should be chosen and in what year will CPC break even?

SOLUTION 3

a. TCC = TCSB

3,900,000 + 3,400(X) = 3,600,000 + 3,700(X)300,000 = 300(X)X = 1,000.00

TCC = TCGR

3,900,000 + 3,400(X) = 3,100,000 + 4,000(X)800,000 = 600(X)X = 1,333.33

TCSB = TCGR

3,600,000 + 3,700(X) = 3,100,000 + 4,000(X)500,000 = 300(X)X = 1,666.67

Cost at 0 Cost at 1,000 Cost at 1,333.33 Cost at 1,666,67 SCANNERS SCANNERS SCANNERS SCANNERS

Location ($ MILLION) ($ MILLION) ($ MILLION) ($ MILLION)Cleveland 3.9 7.3 8.433 9.567South Bend 3.6 7.3 8.533 9.767Grand Rapids 3.1 7.1 8.433 9.767

84 CHAPTER 5

Notice from this table that the Grand Rapids location is preferred until the annual level of production reaches 1,333.33 scanners-. Above this level, the Cleveland location is preferred. This means that South Bend would never be preferred at any level of production.

b. In the first year, when demand is expected to be 1,000 units, Grand Rapids is the preferred location. For year 2 and beyond, when demand is expected to be 2,000 units or more, Cleveland is most economical. Cleveland appears to be the best location choice. CPC will break even during the second year.

EXAMPLE 4

Relative-Aggregate-Scores Approach to Location Decision

The Arkansas Cement Company plans to locate a new cement production facility at either Little Rock, Fort Smith, or Jonesboro. Six location factors are important--cost per ton, labor availability, union activities, local transportation, proximity to similar industry, and proximity to raw materials. The weighting of these factors and the scores for each location are shown below:

Factor Location ScoreRelevant Location Factor Weight Fort Smith Little Rock JonesboroCost per ton .55 $55.40 $62.30 $59.10Labor availability .15 .70 .90 .50Union activities .15 .80 .40 .90Local transportation .08 .70 .70 .60Proximity to similar industry .05 .80 .80 .40Proximity to raw materials .02 .70 .80 .50

Use the relative-aggregate-scores approach to compare the three alternative locations. Which location is preferred?

SOLUTION 4

Fort Smith Little Rock JonesboroRelevant Factor Weight. Weight. Weight.

Location Factor Weight Scores Scores Scores Scores Scores ScoresCost per ton .55 1.000* .550 .889* .489 .937* .515Labor availability .15 .70 .105 .90 .135 .50 .075Union activities .15 .80 .120 .40 .060 .90 .135Local transportation .08 .70 .056 .70 .056 .60 .048Prox. to similar industry .05 .80 .040 .80 .040 .40 .020Prox. to raw materials .02 .70 .014 .80 .016 .50 .010Total Location Scores .885 .796 .803

* These scores are determined by dividing the lowest cost by the actual costs:


55.40/55.40 = 1.000, 55.40/62.30 = .889, and 55.40/59.10 = .937. All other scores are based on a maximum score of 1.00.

Fort Smith is preferred; it has the highest total weighted score (.885)

EXAMPLE 5

Line Balancing: Incremental Utilization Heuristic

Lectro Inc. assembles alternators for automobiles. Ten basic tasks must be performed along the assembly line. The time to perform each task and the tasks that must immediately precede each task are:

Tasks that Time to

Immediately Perform TaskTask Precede (Minutes)

A --- .10B A .15C A .20D B,C .30E --- .40F E .40G D,F .30H G .50I H .60J I .50

If 400 alternators per hour must be produced by the assembly line, 50 minutes per hour are productive, and a maximum of three tasks can be combined into each workstation:

a. Draw a diagram of the precedence relationships.

b. Compute the cycle time per alternator in minutes.

c. Compute the minimum number of workstations required.

d. Combine the tasks into workstations to minimize idle time by using the incremental utilization heuristic.

e. Evaluate your proposed line.

f. Could you use the longest task-time heuristic? Why or why not?

86 CHAPTER 5

SOLUTION 5

a. Precedence diagram:

b.

= 50/400 = .125 minutes per alternator

c.

= (3.45)(400)/50 = 27.6 Workstations

d. Using the incremental utilization heuristic:

(1) (2) (3) (4) (5) (6)Number of Actual

Workstations Number of Utilization ofWork Minutes Per Working Workstat. WorkstationsCtr. Tasks Alternator [(3) Cycle time] Required [(4) (5)] 1001 A .10 .10/.125=0.8 1 80.01 A,B .10+.15=.25 .25/.125=2.0 2 1002 C .20 .20/.125=1.6 2 80.02 C,D .20+.30=.50 .50/.125=4.0 4 1003 E .40 .40/.125=3.2 4 80.03 E,F .40+.40=.80 .80/.125=6.4 7 91.03 E,F,G .80+.30=1.10 1.10/.125=8.8 9 97.83 E,F,G,H 1.10+.50=1.60 1.60/.125=12.8 13 98.53 E,F,G,H,I 1.60+.60=2.20 2.20/.125=17.6 18 97.84 I .60 .60/.125=4.8 5 96.04 I,J .60+.50=1.10 1.10/.125=8.8 9 98.0

Total Number of Workstations Required 28

JA

B

E

H

C

D

F

G I


From the table above, we can summarize the assignment of tasks to work stations:

Tasks in work centers A,B C,D E,F,G,H I,JWork centers 1 2 3 4Actual number of workstations 2.0 4.0 13.0 9.0 28.0 total

e.

(100)

= (27.6/28)100 = 98.6 %

f. Cycle time is .125 minutes per alternator and several of the task times exceed the cycle time. The longest-task-time heuristic is therefore not appropriate for this problem.

EXAMPLE 6

Line Balancing: Longest-Task-Time Heuristic

The time to perform each task and the tasks that must immediately precede are:

Tasks That Time toImmediately Perform Task

Task Precede (Minutes)A --- .15B A .06C B .05D B .12E B .09F B .16G C,D,E .08H G,F .06I H .05

If 300 products are needed per hour and 50 minutes per hour are productive:


b. Compute the cycle time per unit in minutes.


d. Use the longest-task-time heuristic to balance the production line.

e. Evaluate your solution.

88 CHAPTER 5

SOLUTION 6

a. Precedence diagram:

b.

= 50/300 = .167 minutes per unit

c.

= (.830)(300)/50 = 4.92 Workstations

d. Using the longest-task-time heuristic:

(1) (2) (3) (4) (5) (6)Assigned Task Unassigned

Sum of Task Time atWork- Candidate Assigned Task Task Workstationstation List Task Time Times [.167 - (5)]

1 A A .15 .15 .0172 B B .06 .06 .1072 C,E E .09 .15 .0173 C,D,F F .16 .16 .0074 C,D D .12 .12 .0475 C C .05 .05 .1175 G G .08 .13 .0376 H H .06 .06 .1076 I I .05 .11 .057

From the table above, we can summarize the assignment of tasks to work stations:

A B

D

C

I

E

G

F

H


WorkstationTasks in

Workstation1 A2 B, E3 F4 D5 C,G6 H, I

e.

(100)

= (4.92/6)100 = 82.0 %

EXAMPLE 7

Manufacturing Cell Formation

Maxx produces superchargers for high performance cars and trucks. Maxx has implemented a group technology program in its shop and now must formulate the manufacturing cells.

Maxx has identified six parts that meet the requirements for CM. The parts-machines matrix below identifies the 6 parts and 5 machines on which the parts are presently produced.

Organize the machines and parts into two similar-sized production cells that minimize the number of exceptional parts.

Parts

1 2 3 4 5 6

A X X X

B X X X X

Machines C X X

D X X

E X X X

SOLUTION 7

First, rearrange the rows:Place the machines that produce the same parts in adjacent rows.

Parts

90 CHAPTER 5

1 2 3 4 5 6

A X X X

E X X X

Machines D X X

C X X

B X X X X

Next, rearrange the columns:Parts requiring the same machines are put in adjacent columns.

Parts

3 5 6* 1 2 4

A X X X

E X X X

Machines D X X

C X X

B X X X X * Part 6 is an exceptional part

Cell formulation summary:2 manufacturing cells (MC1, MC2) will be used.Parts 3 and 5 will be produced in MC1 on machines A and E.Parts 1, 2 and 4 will be produced in MC2 on machines B, C and D.Part 6 is an exceptional part that cannot be produced within a single cell.

EXAMPLE 8

Service Facility Layout Using Closeness Ratings

AG Advertising is moving into a new office suite having seven large, roughly equal size rooms, one for each department of the firm. Shown below is a template of the office suite floor space to represent the layout of the seven departments.

Lisa, the manager, must now assign each department to a room. She has developed a grid of closeness ratings for the 21 unique pairs of departments.

Dept. A

Dept. B

Dept. C

Dept. D

Dept. E

Dept. F

Dept. G

52

62

43

52

62

43

61

31

6

44

51

45

223

3


ClosenessRating

Meaningof Rating

1 Necessary2 Very Important3 Important4 Slightly Important5 Unimportant6 Undesirable

SOLUTION 8

Layout satisfying all pairings of departments with ‘1’ closeness rating:

CR = 1 B – D B – F C – G

Trying to satisfying all pairings of departments with ‘6’ closeness rating, we see that Dept. C needs to be moved.

CR = 6 A – D B – C

Layout satisfying all pairings of departments with ‘6’ closeness rating (note that Dept. D and Dept. F have been swapped):

EXERCISESs

CB

DB

B

GF

CB

DB

B

GF

92 CHAPTER 5

EXERCISE 1

Decision Tree Analysis: Capacity-Planning Decision

The Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility plans. The first alternative is to build a large new facility immediately. The second alternative is to build a small plant initially and to consider expanding it to a larger facility three years later if the market has proven favorable.

Marketing has provided the following probability estimates for a ten-year plan:

First 3-Year Demand Next 7-Year Demand ProbabilityUnfavorable Unfavorable .2Unfavorable Favorable .0Favorable Favorable .7Favorable Unfavorable .1

If the small plant is expanded, the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for unfavorable. The accounting department has provided the payoff for each outcome:

Demand Facility Plan PayoffFavorable, favorable 1 $5,000,000Favorable, unfavorable 1 2,500,000Unfavorable, unfavorable 1 1,000,000Favorable, favorable 2--expanded 4,000,000Favorable, unfavorable 2--expanded 100,000Favorable, favorable 2--not expanded 1,500,000Favorable, unfavorable 2--not expanded 500,000Unfavorable, unfavorable 2--not expanded 300,000

With these estimates, analyze Sunshine's facility decision and:

a. Perform a complete decision tree analysis.

b. Recommend a strategy to Sunshine.

c. Determine what payoffs will result from your recommendation.

EXERCISE 2

Payback Period: Capacity Planning Decision


A medical clinic wishes to locate its offices near the local hospital. A real estate broker has a professional building to its liking near the hospital and has agreed to either sell the building outright or provide a 50-year lease agreement. The relevant data is:

Lease BuySalvage value -- 0Initial cost -- $450,000Economic life 30 years 30 yearsAnnual depreciation -- $15,000Annual lease payment $45,000 --Tax rate 40% 40%

If the after-tax payback period is less than six years, the clinic will buy the property. If the payback period is longer, it will lease the building. What should the clinic do?

EXERCISE 3

Breakeven Analysis: Location DecisionThree proposed Texas locations for a manufacturing plant have these estimated costs:

Annual Fixed Costs Variable CostLocation (Millions of Dollars) per Unit

Dallas $2.5 $10Houston 3.5 8San Antonio 2.0 12

Determine in what range of annual outputs each of these locations would be preferred.

EXERCISE 4

Relative-Aggregate-Scores Approach to Location Decision

Lowtec, Inc. is looking at new sites for its expansion into its southern markets. Two possibilities are in need of additional analysis before the site selection team makes its final visits. Using the relative-aggregate-scores approach on the following data, make a recommendation to the visitation team.

Factor LocationRelevant Location Factor Weight New Orleans DallasCost to manufacture .50 $376.00 $419.00Labor skill .15 .60 .70Labor availability .05 .40 .50

94 CHAPTER 5

Transportation .20 .60 .55Cost of living .10 .55 .45

EXERCISE 5

Line Balancing: Incremental Utilization Heuristic

The following table provides task and process order information for an assembly line.

Tasks that Time to Tasks that Time toImmediately Perform Task Immediately Perform Task

Task Precede (Minutes) Task Precede (Minutes)A --- .38 F C .50B A .31 G D,E .52C A .45 H F .36D B .42 I G,H .34E B .28

If the demand for the product is 120 per hour and the productive time per hour is 50 minutes, complete the following:

a. Draw a precedence diagram for the data given.

b. What is the cycle time?

c. What is the minimum number of workstations?

d. Combine the tasks into workstations using the incremental utilization heuristic.

e. What is the efficiency of your line?

EXERCISE 6

Line Balancing: Longest-Task-Time Heuristic

The time to perform each task and the tasks that must immediately precede are:

Tasks that Time to Tasks that Time toImmediately Perform Task Immediately Perform Task

Task Precede (Minutes) Task Precede (Minutes)A --- .20 G E,F .08


B --- .05 H --- .12C --- .15 I --- . 05D --- .06 J H,I,G .12E A,B .03 K J .15F C,D .16 L K .08

If 200 products are needed per hour and 50 minutes per hour are productive:


b. Compute the cycle time per unit in minutes.


d. Use the longest-task-time heuristic to balance the production line.

e. Evaluate your solution.

EXERCISE 7

Manufacturing Cell Formation

A manufacturer is interested in creating a cellular manufacturing layout with its current machines. The chart below shows the machines required by each part. Organize the machines and parts into three production cells that minimize the number of exceptional parts.

Parts

1 2 3 4 5 6 7 8A X XB X XC X X X X

Machines D XE X XF X XG X X XH X

EXERCISE 8

Service Facility Layout Using Closeness Ratings

96 CHAPTER 5

The OpenDoor Health Clinic is relocating to a new one-story office building with 20,000 square feet of floor space. The clinic’s director is in the process of deciding the approximate location of each of the clinic’s eight functional entities. Shown below is a template of the rectangular office building with, for simplicity, the floor space divided into eight equal-size areas.

The staff has agreed on closeness ratings for locating functional entities close to one another.

ClosenessRating

Meaningof Rating

1 Necessary2 Very Important3 Important4 Slightly Important5 Unimportant6 Undesirable

Assist the clinic director in developing a layout of the eight functional areas that attempts to minimize the sum of the closeness ratings of adjacent areas.

ANSWERSs KEY TERMS

1. Facility planning 11. Input rate capacity2. Subcontractor network 12. Economies of scale3. Economies of scope 13. Maximum practical capacity4. Percentage of capacity utilization 14. Product layout5. Decision tree analysis 15. Facility layout6. Aggregate unit of capacity 16. Hybrid layout7. Diseconomies of scale 17. Materials-handling system8. Capacity cushion 18. Process layout9. Best operating level 19. Fixed-position layout

10. Expected value 20. Line balancingTRUE/FALSE

1. False 6. False 11. True2. False 7. True 12. False3. True 8. False 13. True

Waiting Room (A)

Admissions (B)

Pharmacy (C)

Doctors’ Offices (D)

Exam. Rooms (E)

Laboratory (F)

Surgery (G)

22

63

46

24

34

6

43

44

15

333

1

Emerg. Room (H)

23

42

21

3


4. False 9. False 14. False5. True 10. True 15. True

MULTIPLE CHOICE

1. D 11. A 21. B2. B 12. C 22. D3. D 13. C 23. B4. C 14. D 24. A5. D 15. C 25. C6. A 16. C 26. B7. D 17. A 27. D8. B 18. C 28. A9. C 19. D 29. D

10. D 20. C 30. C

EXERCISES

1. a. Decision tree:

b. Recommended strategy: Build the large plant

c. Possible payoffs that will result: $5,000,000; $2,500,000; or $1,000,0002. Payback period = $450,000/33,000 = 13.6 years. Clinic should lease the building.

3. Cost at Cost at Cost at Cost at 0 Units 250,000 Units 500,000 Units 1,000,000 Units

Favorable, Favorable

Favorable, Unfavorable

Unfavorable, Unfavorable

$5,000,000

2,500,000

1,000,000

$5,000,000

2,500,000

1,000,000

Build L

arge

Plan

t

Build Small Plant

.7

.2

.1

.7

.2

.1

$4,000,000

100,000

.875

.125

Favorable

Unfavorable

$3,950,000

$2,870,000

|| ||

$3,950,000

.2 Unfavorable, Unfavorable

$1,500,000

500,000

.875

.125

Favorable

Unfavorable

.8

F

avor

able

$1,375,000

$3,512,500

$3,512,500Expand

Don’tExpand

$300,000

98 CHAPTER 5

Location ($ MILLION) ($ MILLION) ($ MILLION) ($ MILLION)Dallas 2.5 5.0 7.5 12.5Houston 3.5 5.5 7.5 11.5San Antonio 2.0 5.0 8.0 14.0

Location Range of OutputDallas 0 – 250,000Houston 250,000 – 500,000San Antonio 500,000 +

4. First, consider the cost of production:New Orleans: $376/$376 = 1.00

Dallas: $376/$419 = .897Now, find weighted aggregate score for each location:

New Orleans: .5(1.00) + .15(.60) + .05(40) + .20(60) + .10(.55) = .785Dallas: .5(.897) + .l5(.70) + .05(.50) + .20(.55) + .10(45) = .7335

This analysis indicates that New Orleans is preferred over Dallas.

5. a. Precedence diagram:

b. Cycle time = .42 minutes

c. Minimum number of workstations = 8.54

d. Tasks in work centers A B,C,D E,F G,H,IWork centers 1 2 3 4Actual number of workstations 1.0 3.0 2.0 3.0 9.0 total

e. Efficiency (utilization) of proposed line = 94.9%

6. a. Precedence diagram:

A

B

E

D

I

C

G

F H

H

KG

I

J

E

F

L

A

B

C

D


b. Cycle time = 50/200 = .25 minutes per unit

c. Minimum number of workstations = (1.25)(200)/50 = 5.02

d. Workstation 1 2 3 4 5 6Tasks in workstation A,B C,D,E F,G H,I J K,L

e. Efficiency (utilization) of proposed line = (5.02/6)100 = 83.7%

7.Parts

3 4 1 8 6 7 2 5

B X XG X X X

D X

Machines E X XH X

A X X

C X X XF X X

3 manufacturing cells (MC1, MC2, and MC3) will be used. Parts 3 and 4 will be

produced in MC1 on machines B, D, and G. Parts 6 and 8 will be produced in MC2 on machines A, E and H. Parts 2, 5, and 7 will be produced in MC3 on machines C and F. Part 1 is an exceptional part that cannot be produced within a single cell.

8. D E

H FG B

C A

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