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Chapter 5

Chapter 5. Capacity and Location Planning. Examples. Burger King. Highly variable demand During lunch hour, demand can increase from 40 to 800 hamburgers/hour Limited in ability to used inventory Facilities designed for flexible capacity

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Chapter 5

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  1. Chapter 5 Capacity and Location Planning Chapter 5: Capacity and Location Planning

  2. Examples Chapter 5: Capacity and Location Planning

  3. Burger King • Highly variable demand • During lunch hour, demand can increase from 40 to 800 hamburgers/hour • Limited in ability to used inventory • Facilities designed for flexible capacity • During off peak times drive through staffed by one worker Chapter 5: Capacity and Location Planning

  4. Burger King continued • During lunch hour drive through staffed by up to five workers who divide up the duties • Second window can be used for customer with special orders • Average transaction time reduced from 45 to 30 seconds • Sales during peak periods increased 50% Chapter 5: Capacity and Location Planning

  5. Burger King continued • Payroll costs as large as food costs • Need to keep costs low but at same time meet highly variable demand • BK-50 restaurant is 35% smaller and costs 27% less to build, but can handle 40% more sales with less labor Chapter 5: Capacity and Location Planning

  6. Semiconductor Industry • Learning from the steel industry • Both industries require large and expensive factories • 1980s steel industry started to abandon economies of scale justification and built minimills • Chipmakers are now constructing smaller and more automated wafer fabs Chapter 5: Capacity and Location Planning

  7. Semiconductor Industry continued • Short life cycles make it difficult to recoup $2 billion it will cost to build wafer fab in 1998 • Payback time is 22-30 month to conventional wafer fab versus 10 months for minifab • Processing time can be reduced from 60-90 days to 7 days. Chapter 5: Capacity and Location Planning

  8. Mercedes-Benz • Early 1990s investigated feasibility of producing luxury sports utility vehicle • Project team established to find location for new plant • Team charged with finding plant outside of Germany • Team initially narrowed search to North America Chapter 5: Capacity and Location Planning

  9. Mercedes-Benz continued • Team determined that North America location would minimize combined labor, shipping, and components cost • Plans indicated production volume of 65,000 vehicles per year and a breakeven volume of 40,000 vehicles • Sites further narrowed to sites within US • Close to primary market Chapter 5: Capacity and Location Planning

  10. Mercedes-Benz continued • Minimize penalties associated with currency fluctuations • 100 sites in 35 state identified • Primary concern was transportation cost • Since half production was for export, focused on sites close to seaports, rail lines, and major highways Chapter 5: Capacity and Location Planning

  11. Mercedes-Benz continued • Worker age and mix of skills also considered • Sites narrowed to sites in NC, SC, and AL • These sites relatively equal in terms of business climate, education level, transportation, and long-term costs • AL chosen due to perception of high dedication to the project Chapter 5: Capacity and Location Planning

  12. Geographic Information Systems • View and analyze data on digital maps • Retail store in WI analyzed sales data on a map • The map demonstrated that each store drew majority of sales from 20 mile radius • Map highlighted area where only 15% of potential customers had visited one of its stores Chapter 5: Capacity and Location Planning

  13. Sport Obermeyer • Highly volatile demand • Combined costs of stockouts and markdowns can exceed manufacturing costs • Determine which items can and cannot be predicted well • Products that can be predicted produced furthest in advance • Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s Chapter 5: Capacity and Location Planning

  14. Insights • Capacity planning applies to both manufacturing and service organizations • Capacity options can be categorized as short-term or long-term • Changing staffing level is short-term • Building new minifab is long-term Chapter 5: Capacity and Location Planning

  15. Insights continued • Semiconductor industry illustrates the enormous cost often associated with expanding capacity • Shorter product life cycles add further complications • Volatile demand can further complicate capacity planning Chapter 5: Capacity and Location Planning

  16. Introduction • Capacity needs determined on the basis of forecast of demand. • In addition to determining capacity needed, the location of the capacity must also be determined. • Mercedes-Benz example illustrates that location decisions are often made in stages. Chapter 5: Capacity and Location Planning

  17. Sport Obermeyer • Highly volatile demand • Combined costs of stockouts and markdowns can exceed manufacturing costs • Determine which items can and cannot be predicted well • Products that can be predicted produced furthest in advance • Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s Chapter 5: Capacity and Location Planning

  18. Forecasting Purposes and Methods Chapter 5: Capacity and Location Planning

  19. Primary Uses of Forecasting • To determine if sufficient demand exists • To determine long-term capacity needs • To determine midterm fluctuations in demand so that short-sighted decisions are not made that hurt company in long-run • To determine short-term fluctuations in demand for production planning, workforce scheduling, and materials planning Chapter 5: Capacity and Location Planning

  20. Forecasting Methods • Informal (intuitive) • Formal • Quantitative • Qualitative Chapter 5: Capacity and Location Planning

  21. Forecasting Methods Chapter 5: Capacity and Location Planning

  22. Qualitative Methods • Life cycle • Surveys • Delphi • Historical analogy • Expert opinion • Consumer panels • Test marketing Chapter 5: Capacity and Location Planning

  23. Quantitative Methods • Causal • Input-output • Econometric • Box-Jenkins • Autoprojection • Multiplicative • Exponential smoothing • Moving average Chapter 5: Capacity and Location Planning

  24. Choosing a Forecasting Method • Availability of representative data • Time and money limitations • Accuracy needed Chapter 5: Capacity and Location Planning

  25. Long-Term Capacity/Location Planning Chapter 5: Capacity and Location Planning

  26. Terminology • Maximum rate of output of the transformation system over some specified duration • Capacity issues applicable to all organizations • Often services cannot inventory output • Bottlenecks • Yield (or revenue) management Chapter 5: Capacity and Location Planning

  27. Long-term Capacity Planning • Unit cost as function of facility size • Economies of scale • Economies of scope Chapter 5: Capacity and Location Planning

  28. Envelope of Lowest Unit Output Costs with Facility Size Chapter 5: Capacity and Location Planning

  29. Demand and Life Cycles for Multiple Outputs • Demand Seasonality • Output Life Cycles Chapter 5: Capacity and Location Planning

  30. Anti-cyclic Product Sales Chapter 5: Capacity and Location Planning

  31. Forecast of Required Organizational Capacity from Multiple Life Cycles Chapter 5: Capacity and Location Planning

  32. Timing of Capacity Increments Chapter 5: Capacity and Location Planning

  33. Location Planning Strategies Chapter 5: Capacity and Location Planning

  34. Capabilities and the Location Decision • Often driven too much by short-term considerations • wage rates • exchange rates • Better approach is to consider how location impacts development of long-term capabilities Chapter 5: Capacity and Location Planning

  35. Six Step Process • Identify sources of value • Identify capabilities needed • Assess implications of location decision on development of capabilities • Identify potential locations • Evaluate locations • Develop strategy for building network of locations Chapter 5: Capacity and Location Planning

  36. Stage 1: Regional-International • Minimize transportation costs and provide acceptable service • Proper supply of labor • Wage rates • Unions (right-to-work laws) • Regional taxes, regulations, trade barriers • Political stability Chapter 5: Capacity and Location Planning

  37. Stage 2: Community • Availability of acceptable sites • Local government attitudes • Regulations, zoning, taxes, labor supply • Tax Incentives • Community’s attitude • Amenities Chapter 5: Capacity and Location Planning

  38. Breakeven Location Model Chapter 5: Capacity and Location Planning

  39. Stage 3: Site • Size • Adjoining land • Zoning • Drainage • Soil • Availability of water, sewers, utilities • Development costs Chapter 5: Capacity and Location Planning

  40. Wi = importance of factor i Si = score of location being evaluated on factor i i = an index for the factors Weighted Score Model Chapter 5: Capacity and Location Planning

  41. Locating Pure Service Organizations • Recipient to Facility • facility utilization • travel distance per citizen • travel distance per visit • Facility to Recipient Chapter 5: Capacity and Location Planning

  42. Short Term Capacity Planning Chapter 5: Capacity and Location Planning

  43. Bottlenecks in Sequential Operations Chapter 5: Capacity and Location Planning

  44. Efficiency and Output Increase when Machines are Being Added Chapter 5: Capacity and Location Planning

  45. Product and Service Flows Chapter 5: Capacity and Location Planning

  46. Process Flow Map for a Service Chapter 5: Capacity and Location Planning

  47. Implementing the Theory of Constraints • Identify the system’s constraints • Exploit the constraint • Subordinate all else to the constraint • Elevate the constraint • If constraint is no longer a bottleneck, find the next constraint and repeat the steps. Chapter 5: Capacity and Location Planning

  48. Relationship between Capacity and Scheduling • Capacity is oriented toward the acquisition of productive resources • Scheduling related to the timing of the use of resources Chapter 5: Capacity and Location Planning

  49. Gantt Charts for Capacity Planning and Scheduling (Infeasible) Chapter 5: Capacity and Location Planning

  50. Gantt Charts for Capacity Planning and Scheduling (Feasible) Chapter 5: Capacity and Location Planning

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