Chapter 5
Capacity and Location Planning
Chapter 5: Capacity and Location Planning
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Examples
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Burger King
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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
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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
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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
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Semiconductor Industry
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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
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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
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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
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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
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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
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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
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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
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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
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Capacity planning applies to both
manufacturing and service organizations
Capacity options can be categorized as
short-term or long-term
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Changing staffing level is short-term
Building new minifab is long-term
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Insights continued
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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
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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
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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
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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
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Informal (intuitive)
Formal
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Quantitative
Qualitative
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Forecasting Methods
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Qualitative Methods
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Life cycle
Surveys
Delphi
Historical analogy
Expert opinion
Consumer panels
Test marketing
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Quantitative Methods
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Causal
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Input-output
Econometric
Box-Jenkins
Autoprojection
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Multiplicative
Exponential smoothing
Moving average
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Choosing a Forecasting Method
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Availability of representative data
Time and money limitations
Accuracy needed
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Long-Term Capacity/Location
Planning
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Terminology
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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
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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
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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
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Often driven too much by short-term
considerations
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wage rates
exchange rates
Better approach is to consider how
location impacts development of longterm capabilities
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Six Step Process
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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
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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
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Availability of acceptable sites
Local government attitudes
Regulations, zoning, taxes, labor supply
Tax Incentives
Community’s attitude
Amenities
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Breakeven Location Model
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Stage 3: Site
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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
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Recipient to Facility
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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
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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.
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Relationship between Capacity and
Scheduling
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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
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Increase resources
Improve resource use
Modify the output
Modify the demand
Do not meet demand
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Increase Resources
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Overtime
Add shifts
Employ part-time workers
Use floating workers
Subcontract
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Improve Resource Use
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Overlap or stagger shifts
Schedule appointments
Inventory output
Backlog demand
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Modify the Output
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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
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Modify the Demand
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change the price
change the promotion
Do Not Meet Demand
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Capacity Planning for Services
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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
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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
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Mechanism to determine several key
performance measures of operating
system.
Trade-off two costs
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cost of waiting
cost of service
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Waiting Line Analysis
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Principles of Waiting
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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
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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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