Chapter 7 Facility decisions: Location and capacity, after studying this chapter you will be able to: 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;...
DAVIS F O U R T H E D I T I O N AQUILANO CHASE chapter Facility Decisions: Location and Capacity © The McGraw-Hill Companies, Inc., 2003 PowerPoint Presentation by Charlie Cook Chapter Objectives 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 © The McGrawHill systems (GIS) as a tools for evaluating locations Fundamentals of Operations Companies, Inc., 2003 Management 4e 7–2 Managerial Issues 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 © The McGrawHill Companies, Inc., 2003 7–3 Locating Manufacturing Facilities 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 © The McGrawHill Fundamentals of Operations Companies, Inc., 2003 Management 4e 7–4 Qualitative Location Factors 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 ã Political/Economic Stability âTheMcGrawưHill FundamentalsofOperations Management4e Companies, Inc., 2003 7–5 Comparison of 1995 Hourly Wages Comparison of 1995 Hourly Wages for Manufacturing Workers for Manufacturing Workers Fundamentals of Operations Management 4e Source: Bureau of Labor Statistics, September 7, 2000 © The McGrawHill Companies, Inc., 2003 Exhibit 7.1 7–6 Quantitative Location Factors 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 © The McGrawHill investment in the form of manufacturing facilities Fundamentals of Operations Management 4e Companies, Inc., 2003 7–7 Quantitative Location Factors 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 © The McGrawHill Companies, Inc., 2003 7–8 Customer Requirements and Location Customer Requirements and Location Strategies for Service Organizations Strategies for Service Organizations Fundamentals of Operations Management 4e Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no (February 1997), pp 32–35 © The McGrawHill Companies, Inc., 2003 Exhibit 7.2 7–9 Computer Programs for Site Selection 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 © The McGrawHill Companies, Inc., 2003 7–10 Grid Map of Ye Old Bake Shoppe’s Grid Map of Ye Old Bake Shoppe’s Retail Locations Retail Locations Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.4 7–19 Factors Affecting Capacity Decisions 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 © The McGrawHill – Quality control systems Fundamentals of Operations Companies, Inc., 2003 – Management capabilities Management 4e 7–20 Capacity Decisions 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 © The McGrawHill Companies, Inc., 2003 7–21 Important Capacity Concepts 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 © The McGrawHill Fundamentals of Operations Management 4e Companies, Inc., 2003 7–22 Comparing Capacity and Demand Comparing Capacity and Demand in a Service Operation in a Service Operation Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.5 7–23 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) Important Capacity Concepts 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 © The McGrawHill Fundamentals of Operations Companies, Inc., 2003 Management 4e 7–24 Economies of Scale Economies of Scale Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.6 7–25 Important Capacity Concepts Important Capacity Concepts • Capacity Flexibility –Ability to provide a wider range of products and volumes with short lead times • Flexible plants • Flexible workers • Subcontracting • Flexible processes • Use of External Capacity • Sharing capacity • Agile Manufacturing –The capability of a manufacturing process to respond quickly to marketplace changes • Capacity Balance © The McGrawHill –Balanced internal operational capacities Fundamentals of Operations Companies, Inc., 2003 Management 4e 7–26 Strategies for Adding Capacity: Strategies for Adding Capacity: Proactive Strategy Proactive Strategy Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.7a 7–27 Strategies for Adding Capacity: Strategies for Adding Capacity: Neutral Strategy Neutral Strategy Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.7b 7–28 Strategies for Adding Capacity: Strategies for Adding Capacity: Reactive Strategy Reactive Strategy Fundamentals of Operations Management 4e Time © The McGrawHill Companies, Inc., 2003 Exhibit 7.7c 7–29 Capacity Planning 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 © The McGrawHill Fundamentals of Operations Companies, Inc., 2003 Management 4e 7–30 Capacity Measures 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 © The McGrawHill Companies, Inc., 2003 7–31 Plant Location Matrix Plant Location Matrix Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.8 7–32 Quantity of Compressors Required Quantity of Compressors Required at Each Plant at Each Plant Fundamentals of Operations Management 4e © The McGrawHill Companies, Inc., 2003 Exhibit 7.9 7–33 ... 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... Customer Contact –Back -of- the-house operations that are involved with the processing and distribution of goods © The McGrawHill Fundamentals? ?of? ?Operations? ? Companies, Inc., 2003 Management? ?4e 7–14... coordinate of center of gravity –Calculate Y coordinate of center of gravity Fundamentals? ?of? ?Operations? ? Management? ?4e © The McGrawHill Companies, Inc., 2003 7–17 Center? ?of? ?Gravity Formulas Center? ?of? ?Gravity Formulas