Strategic Capacity Planning and Facility Location

Strategic Capacity Planning

What Size Should the Operations System Be?

MTSU 3

Capacity Problems

Movie theaters Electrical energy-California

MTSU 4

Capacity Amount of resource inputs available relative to

output requirements at a particular time Some measurements of capacity

Output rate capacityAggregate capacity Input rate capacityPercentage of capacity utilization

Strategic capacity planning specifies the overall capacity level of resources that best supports the firm’s long range competitive strategy

MTSU 5

Capacity Planning

Considerations in Changing Capacity Alternatives When Changing Capacity Determining Capacity Requirements

MTSU 6

Considerations inChanging Capacity

Maintaining System Balance Frequency of Capacity Changes External Sources of Capacity

Subcontractor networksSharing capacitySupplier networks

MTSU 7

Expansion of Long-Term Capacity

Subcontract Acquire capacity Develop new sites Expand current sites Reactivate standby facilities

MTSU 8

Reduction of Long-Term Capacity

Sell off existing facilities Mothball facilities Develop and phase in new products/services

MTSU 9

Steps in theCapacity Planning Process

Estimate the capacity of the present facilities

Forecast the long-range future capacity needs

Identify and analyze sources of capacity to meet these needs

Select from among the alternative sources of capacity

MTSU 10

Forecasting Capacity Demand

Long-range forecast of market demand Estimate the firm’s market share Multiply the forecasted market demand by

the estimated market share Adjust for utilization and efficiency factors Translate firm’s demand into machine and

labor capacity needs

MTSU 11

Importance of Capacity Decisions

Impact the ability of the firm to meet future demands for products and services

Affect operating costs Usually a major determinant of initial cost Involves long-term commitment of resources

and difficult to modify Affect competitiveness

MTSU 12

Types of Capacity

Design capacitymaximum obtainable output

Effective capacityMaximum capacity given product mix,

scheduling difficulties, and other doses of reality.

Actual output rate of output actually achieved--cannot exceed

effective capacity.

MTSU 13

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Efficiency and Utilization

MTSU 14

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

Actual output 36 units/day Efficiency = = = 90%

Effective capacity 40 units/ day

Actual output 36 units/day Utilization = = = 72%

Design capacity 50 units/day

Efficiency/Utilization Example

MTSU 15

Minimumcost

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Production units have an optimal rate of output for minimal cost.

Optimal Output Rate

MTSU 16

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Smallfacility Medium

facility Largefacility

Output rate

Minimum cost & optimal operating rate are functions of size of

production unit

MTSU 17

Other Considerations Resource availability The experience curve Focus Flexibility

Economies of scope Accuracy of the long-range forecast Capacity cushion Changes in competitive environment

MTSU 18

Decision Approaches

Break-even Analysis Present-value Analysis Decision Tree Analysis Computer Simulation Waiting Line Analysis Linear Programming

MTSU 19

Planning Service CapacityTiming

Services cannot be stored for later useCapacity must be available to produce a service

at the time when it is needed

LocationFor high contact services, capacity must be

located near the customer

Volatility of DemandServices cannot be storedCustomers interact directly with the system and

each may have different requirementsDirectly affected by consumer behavior

MTSU 20

Facility Location

MTSU 21

Some Reasons the Facility Location Decision Arises (1 of 2)

Changes in the marketExpansionContractionGeographic shift

Changes in inputsLabor skills and/or costsMaterials costs and/or availabilityUtility costs

MTSU 22

Reasons (2 of 2)

Changes in the environmentRegulations and lawsAttitude of the community

MTSU 23

Characteristics of the Facility Location Decision

Infrequent Expensive to implement Studied and evaluated extensively Determination of a site involves narrowing

the scope of the area being considered Involves a long-term commitment

MTSU 24

Some Factors Affecting the Location Decision (1 of 2)

Economic Site acquisition, preparation and construction

costsLabor costs, skills and availabilityUtilities costs and availabilityTransportation costsTaxes

MTSU 25

Factors (2 of 2) Noneconomic

Proximity to customersLabor attitudes and traditionsTraining and employment servicesCommunity’s attitudeSchools and churchesRecreation and cultural attractionsAmount and type of housing availablePolitical riskLocation of other facilities

MTSU 26

Analyzing Service Location Decisions

Consumer behavior research Market research Data gathering for each location alternative Revenue projection for each location

alternative Profit projection for each location

alternative

MTSU 27

Examples of Decision Approaches Break-even Analysis Rating Scale Relative-Aggregate-Scores Present-value Analysis Cost Minimization Models

Center of gravity method Decision Tree Analysis Computer Simulation Linear Programming

MTSU 28