Facility Decisions: Location and Capacity

1. DAVIS AQUILANO CHASE PowerPointPresentation by Charlie Cook Facility Decisions:Location and Capacity F O U R T H E D I T I O N chapter 7 © The McGraw-Hill Companies, Inc., 2003

2. Chapter Objectives • Present a framework for evaluating alternative site locations. • Identify the various factors, both quantitative and qualitative, that should be taken into consideration when selecting a location for a manufacturing or service organization. • Distinguish between those factors that are important for locating a manufacturing facility and those that are important for locating a service operation. • Introduce the concept of geographic information systems (GIS) as a tools for evaluating locations. Fundamentals of Operations Management 4e

3. Managerial Issues • Deciding how large, when, where and what processes to include in the construction of a facility. • Understanding the different risks associated with back-of-the-house and front-of-the-house investments as they relate to customer demographics and characteristics of a given location for product manufacturing and service producing firms. • Factoring the complications of globalization into location decision. Fundamentals of Operations Management 4e

4. Locating Manufacturing Facilities • Products that decrease in weight and volume during manufacturing tend to be located near the sources of raw materials. • Products that increase in weight and volume during manufacturing tend to be located near the consumers. • One site cost disadvantage such as transportation may be offset by a cost savings advantage specific to the site such as low labor costs. • A location analysis should consider both qualitative and quantitative factors Fundamentals of Operations Management 4e

5. Qualitative Location Factors • Local Infrastructure • Institutional (e.g., reliable electrical power grid) • Transportational (e.g., railway systems) • Worker Education and Skills • Education and skills of local workers. • Product Content Requirements • The minimum percentage of product that must be produced in a country in order for the product to be sold in that country. • Political/Economic Stability Fundamentals of Operations Management 4e

6. Comparison of 1995 Hourly Wages for Manufacturing Workers Exhibit 7.1 Source: Bureau of Labor Statistics, September 7, 2000. Fundamentals of Operations Management 4e

7. Quantitative Location Factors • Labor Costs • Labor costs vary dramatically, depending on location. Cheap labor often lacks needed education and skills. • Distribution Costs • Distance and the time required to deliver products can offset lower location costs. • Facility Costs • Special economic zones (SEZ) • Duty-free areas established to attract foreign investment in the form of manufacturing facilities. Fundamentals of Operations Management 4e

8. Quantitative Location Factors • Exchange Rates • Variations in rates can have a significant effect on sales and profits. • Tax Rates • Taxes vary considerably between countries and within countries. • All forms of taxes should be considered (property, payroll, inventory, and investment taxes). Fundamentals of Operations Management 4e

9. Customer Requirements and Location Strategies for Service Organizations Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35. Exhibit 7.2 Fundamentals of Operations Management 4e

10. Computer Programs for Site Selection • Geographic Information Systems (GIS) • Computer tool that assesses alternative locations for service operations. • Provides a “bird’s eye view” of a particular region of interest. Fundamentals of Operations Management 4e

11. Distribution of a Bank’s Housing Loans in an Area Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997. Exhibit 7.3a Fundamentals of Operations Management 4e

12. Distribution of Sales for Regional Mall by Area Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997. Exhibit 7.3b Fundamentals of Operations Management 4e

13. Demand for Health Care in a Region and the Services That Are Available Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997. Exhibit 7.3c Fundamentals of Operations Management 4e

14. Types of Service Facilities • Facilities with a Direct Interface with the Customer • Brick and mortar facilities (front-of-the-house) that require the customer to be present. • Facilities with Indirect Customer Contact • Services that link only indirectly with the customer who is not required to be present. • Facilities with No Customer Contact • Back-of-the-house operations that are involved with the processing and distribution of goods. Fundamentals of Operations Management 4e

15. Evaluating Potential Locations • Factor Rating System • Identify the specific criteria or factors to be considered. • Assign a weight to each factor. • Select a common scale for rating each factor. • Rate each potential location on each of the factors. • Multiply each factor’s score by its weight. • Sum the weighted scores and select the location with the highest score. Fundamentals of Operations Management 4e

16. Factor-Rating System Example • The Low-Credit Card Interest Bank Fundamentals of Operations Management 4e

17. Evaluating Potential Locations • Center of Gravity Method • Used to determine the optimal location of a facility based on minimizing the transportation costs between where the goods are produced and where they are sold or redistributed. • Locate each existing operation on an X and Y coordinate grid map. • Calculate X coordinate of center of gravity • Calculate Y coordinate of center of gravity Fundamentals of Operations Management 4e

18. Center of Gravity Formulas Cx= X coordinate of the center of gravityCy = Y coordinate of the center of gravitydix = X coordinate of the ith locationdiy = Y coordinate of the ith locationVi= Volume of goods transported to the ith location Fundamentals of Operations Management 4e

19. Grid Map of Ye Old Bake Shoppe’sRetail Locations Exhibit 7.4 Fundamentals of Operations Management 4e

20. Factors Affecting Capacity Decisions • External Factors • Government regulations • Union agreements • Supplier capabilities • Internal • Product and service design • Personnel and jobs • Plant layout and process flow • Equipment capabilities and maintenance • Materials management • Quality control systems • Management capabilities Fundamentals of Operations Management 4e

21. Capacity Decisions • Production System Capacity Affects: • Response rate to market changes • Overall product cost structure • Composition of the workforce • Level of production technology utilized • Extent of management and staff support • General inventory strategy Fundamentals of Operations Management 4e

22. Important Capacity Concepts • Balancing Capacity and Demand • Demand exceeds capacity, customers are turned away. • Demand exceeds optimum capacity, customers receive poor service. • Demand equals optimum capacity, customers are service properly. • Demand is less than optimum capacity, there is idle capacity • Too much capacity—costs rise. • Too little capacity—customers are lost. Fundamentals of Operations Management 4e

23. Comparing Capacity and Demandin a Service Operation Source: Adapted from Christopher Lovelock, “Strategies for Managing Capacity-Constrained Services,” Managing Services: Marketing, Operations Management and Human Resources, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1992). Exhibit 7.5 Fundamentals of Operations Management 4e

24. Important Capacity Concepts • Best Operating Level • The capacity (production volume) for which the average unit cost of output is at a minimum. • Economies of Scales • The output range in which average units costs decrease as unit production volumes increase. • Diseconomies of Scale • The output range in which average unit costs rise due to added costs incurred at operating levels exceeding the best operating level. Fundamentals of Operations Management 4e

25. Economies of Scale Exhibit 7.6 Fundamentals of Operations Management 4e

26. Important Capacity Concepts • Capacity Flexibility • Ability to provide a wider range of products and volumes with short lead times. • Flexible plants • Flexible processes • Flexible workers • Use of External Capacity • Subcontracting • Sharing capacity • Agile Manufacturing • The capability of a manufacturing process to respond quickly to marketplace changes. • Capacity Balance • Balanced internal operational capacities Fundamentals of Operations Management 4e

27. Strategies for Adding Capacity:Proactive Strategy Exhibit 7.7a Fundamentals of Operations Management 4e

28. Strategies for Adding Capacity:Neutral Strategy Exhibit 7.7b Fundamentals of Operations Management 4e

29. Strategies for Adding Capacity:Reactive Strategy Time Exhibit 7.7c Fundamentals of Operations Management 4e

30. Capacity Planning • Capacity Planning • Determining which level of capacity to operate at to meet customer demand in a cost efficient manner. • Forecast sales for each product line. • Forecast sales for individual products within each line. • Calculate labor and equipment requirements to meet product line forecasts. • Project labor and equipment availabilities over the planning horizon. Fundamentals of Operations Management 4e

31. Capacity Measures • Capacity • The output of a process or facility over a given time period. • Capacity Utilization • The percentage of the available capacity that is actually being used. Fundamentals of Operations Management 4e

32. Plant Location Matrix Exhibit 7.8 Fundamentals of Operations Management 4e

33. Quantity of Compressors Required at Each Plant Exhibit 7.9 Fundamentals of Operations Management 4e