Chapter 5

Capacity and Location Planning

Chapter 5: Capacity and Location Planning

Examples

Chapter 5: Capacity and Location Planning

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
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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%
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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

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
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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 6090 days to 7 days.
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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
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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
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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
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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
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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
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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
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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

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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
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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.
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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
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Forecasting Purposes and Methods

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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
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Forecasting Methods
 

Informal (intuitive) Formal

 

Quantitative Qualitative

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Forecasting Methods

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Qualitative Methods
      

Life cycle Surveys Delphi Historical analogy Expert opinion Consumer panels Test marketing
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Quantitative Methods


Causal
  

Input-output Econometric Box-Jenkins Multiplicative Exponential smoothing Moving average

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Autoprojection
  

Choosing a Forecasting Method

  

Availability of representative data Time and money limitations Accuracy needed

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Long-Term Capacity/Location Planning

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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
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Long-term Capacity Planning

  

Unit cost as function of facility size Economies of scale Economies of scope

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Envelope of Lowest Unit Output Costs with Facility Size

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Demand and Life Cycles for Multiple Outputs

 

Demand Seasonality Output Life Cycles

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Anti-cyclic Product Sales

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Forecast of Required Organizational Capacity from Multiple Life Cycles

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Timing of Capacity Increments

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Location Planning Strategies

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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 longterm capabilities

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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
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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
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Stage 2: Community
     

Availability of acceptable sites Local government attitudes Regulations, zoning, taxes, labor supply Tax Incentives Communitys attitude Amenities

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Breakeven Location Model

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Stage 3: Site
      

Size Adjoining land Zoning Drainage Soil Availability of water, sewers, utilities Development costs
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Weighted Score Model

Wi = importance of factor i Si = score of location being evaluated on factor i i = an index for the factors

Total weighted score = WiSi

i
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Locating Pure Service Organizations



Recipient to Facility
  

facility utilization travel distance per citizen travel distance per visit

Facility to Recipient

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Short Term Capacity Planning

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Bottlenecks in Sequential Operations

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Efficiency and Output Increase when Machines are Being Added

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Product and Service Flows

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Process Flow Map for a Service

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Implementing the Theory of Constraints

    

Identify the systems 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.
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Relationship between Capacity and Scheduling



Capacity is oriented toward the acquisition of productive resources Scheduling related to the timing of the use of resources

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Gantt Charts for Capacity Planning and Scheduling (Infeasible)

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Gantt Charts for Capacity Planning and Scheduling (Feasible)

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Short-Term Capacity Alternatives

    

Increase resources Improve resource use Modify the output Modify the demand Do not meet demand

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Increase Resources
    

Overtime Add shifts Employ part-time workers Use floating workers Subcontract

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Improve Resource Use

   

Overlap or stagger shifts Schedule appointments Inventory output Backlog demand

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Modify the Output

  

Standardize the output Have recipient do part of the work Transform service operations into inventoriable product operations Cut back on quality

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Demand Options


Modify the Demand

 

change the price change the promotion

Do Not Meet Demand

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Capacity Planning for Services

  

Large fluctuations in demand Inventory often not an option Problem often is to match staff availability with customer demand May attempt to shift demand to off-peak periods Can measure capacity in terms of inputs
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The Learning Curve

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Background


In airframe manufacturing industry observed that each time output doubled, labor hour per plane decreased by fixed percentage

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Learning Curve Function

M = mNr M = labor-hours for Nth unit m = labor-hours for first unit N = number of units produced r = exponent of curve = log(learning rate)/0.693
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Typical Pattern of Learning and Forgetting

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Queuing and the Psychology of Waiting

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Waiting-Line Analysis


Mechanism to determine several key performance measures of operating system. Trade-off two costs
 

cost of waiting cost of service

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Waiting Line Analysis

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Principles of Waiting


 

Unoccupied time feels longer than occupied time. Pre-service waiting feels longer than inservice waiting. Anxiety makes waiting seem longer. Uncertain waiting is longer than known, finite waiting.
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Principles of Waiting continued



 

Unexplained waiting is longer than explained waiting. Unfair waiting is longer than fair waiting. Solo waiting is longer than group waiting. The more valuable the service, the longer it is worth waiting for.
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