Chapter 9-: Capacity Planning & Facility Location

Chapter 9– Capacity Planning
& Facility Location
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
© Wiley 2010 1
Capacity planning
 Capacity is the maximum output rate of a facility
 Capacity planning is the process of establishing the
output rate that can be achieved at a facility:
 Capacity is usually purchased in “chunks”
 Strategic issues: how much and when to spend
capital for additional facility & equipment

 Tactical issues: workforce & inventory levels, &
day-to-day use of equipment
© Wiley 2010 2
Measuring Capacity Examples
 There is no one best way to measure capacity
 Output measures like kegs per day are easier to understand
 With multiple products, inputs measures work better
Input Measures of Output Measures

Type of Business
Capacity of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Floor space in
Retail store Revenue per foot
square feet
© Wiley 2010 3
Measuring Available Capacity
 Design capacity:
 Maximum output rate under ideal conditions
 A bakery can make 30 custom cakes per day
when pushed at holiday time
 Effective capacity:
 Maximum output rate under normal (realistic)
conditions
 On the average this bakery can make 20
custom cakes per day
© Wiley 2010 4
Measuring Effectiveness of
Capacity Use
 Measures how much of the available
capacity is actually being used:
Utilizatio n 
actual output rate
100%
capacity
 Measures effectiveness
 Use either effective or design capacity in
denominator
© Wiley 2010 5
Example of Computing Capacity Utilization: A bakery’s
design capacity is 30 custom cakes per day. Currently the bakery is
producing 28 cakes per day. What is the bakery’s capacity
utilization relative to both design and effective capacity?
actual output 28
Utilizatio n effective  (100%)  (100%)  140%
effective capacity 20
actual output 28
Utilizatio n design  (100%)  (100%)  93%
design capacity 30
 The current utilization is only slightly below its design

capacity and considerably above its effective capacity
 The bakery can only operate at this level for a short period
of time
© Wiley 2010 6
Capacity Considerations
 The Best Operating Level is the output that results in
the lowest average unit cost
 Economies of Scale:
 Where the cost per unit of output drops as volume of output
increases
 Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
 Diseconomies of Scale:
 Where the cost per unit rises as volume increases
 Often caused by congestion (overwhelming the process with too
much work-in-process) and scheduling complexity
© Wiley 2010 7
Best Operating Level and Size
 Alternative 1: Purchase one large facility, requiring one large

initial investment
 Alternative 2: Add capacity incrementally in smaller chunks as
needed
© Wiley 2010 8
Other Capacity Considerations
 Focused factories:
 Small, specialized facilities with limited
objectives
 Plant within a plant (PWP):
 Segmenting larger operations into smaller
operating units with focused objectives
 Subcontractor networks:
 Outsource non-core items to free up
capacity for what you do well
© Wiley 2010 9
Making Capacity Planning
Decisions
The three-step procedure for making
capacity planning decisions is as
follows:
1. Identify Capacity Requirements
2. Develop Capacity Alternatives
3. Evaluate Capacity Alternatives
© Wiley 2010 10
Identifying capacity
requirements
 Forecasting Capacity:
 Long-term capacity requirements based on future demand
 Identifying future demand based on forecasting
 Forecasting, at this level, relies on qualitative forecast models
 Executive opinion
 Delphi method
 Forecast and capacity decision must included strategic implications
 Capacity cushions
 Plan to underutilize capacity to provide flexibility
 Strategic Implications
 How much capacity a competitor might have
 Potential for overcapacity in industry a possible hazard
© Wiley 2010 11
Developing & Evaluating Capacity
Alternatives
 Capacity alternatives include
 Could do nothing,
 expand large now (may included
capacity cushion), or
 expand small now with option to add
later
 Use decision support aids to evaluate
decisions (decision tree most popular)
© Wiley 2010 12
Decision trees
Diagramming technique which uses
 Decision points – points in time when decisions
are made, squares called nodes
 Decision alternatives – branches of the tree off
the decision nodes
 Chance events – events that could affect a
decision, branches or arrows leaving circular
chance nodes
 Outcomes – each possible alternative listed
© Wiley 2010 13
Decision tree diagrams
Decision trees developed by
 Drawing from left to right
 Use squares to indicate decision points
 Use circles to indicate chance events
 Write the probability of each chance by the
chance (sum of associated chances = 100%)
 Write each alternative outcome in the right
margin
© Wiley 2010 14
Example Using Decision Trees: A restaurant owner has
determined that she needs to expand her facility. The alternatives
are to expand large now and risk smaller demand, or expand on a
smaller scale now knowing that she might need to expand again in
three years. Which alternative would be most attractive? (see notes)
© Wiley 2010 15
Evaluating the Decision Tree
 Decision tree analysis utilizes expected value
analysis (EVA)
 EVA is a weighted average of the chance events
 Probability of occurrence * chance event outcome
 Refer to previous slide
 At decision point 2, choose to expand to maximize
profits ($200,000 > $150,000)
 Calculate expected value of small expansion:
 EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000
© Wiley 2010 16
Evaluating the Decision
Tree con’t
 Calculate expected value of large expansion:
 EVlarge = 0.30($50,000) + 0.70($300,000) =
$225,000
 At decision point 1, compare alternatives &
choose the large expansion to maximize the
expected profit:
 $225,000 > $164,000
 Choose large expansion despite the fact that
there is a 30% chance it’s the worst decision:
 Take the calculated risk!
© Wiley 2010 17

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Chapter 9– Capacity Planning

& Facility Location

 Strategic issues: how much and when to spend

capital for additional facility & equipment

day-to-day use of equipment

Input Measures of Output Measures

 The current utilization is only slightly below its design

 Alternative 1: Purchase one large facility, requiring one large

 Identifying future demand based on forecasting

 Forecasting, at this level, relies on qualitative forecast models

 Forecast and capacity decision must included strategic implications

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