Chapter 9: Capacity Planning and Facility Location

Overview
This chapter defines capacity planning and location analysis and explains the steps and
factors considered when making these types of decisions. The relationship between
capacity planning and location analysis is described. The use of decision support tools
for capacity planning and location analysis is described.
Answers to Discussion Questions in Textbook
1. Explain why capacity planning is important to a business.
Having the wrong level of capacity causes negative effects. Too much capacity
means that are costs are higher than they should be since we are paying for more land,
equipment and a larger building than we need. Not enough capacity negatively
affects the level of service provided to our customers.
2. Explain the differences between design capacity and effective capacity.
Design capacity is the maximum output that can be achieved using temporary
measures, such as overtime and subcontracting. Effective capacity is the maximum
output that can be achieved under normal conditions, including realistic work
schedules and regular staff levels. Effective capacity is usually less than design
capacity. Effective capacity is what we can achieve over long periods of time, while
design capacity can be reached on a short-term basis.
3. How is capacity utilization computed, and what does it tell us?
Capacity utilization is the actual output divided by the capacity times 100%. It tells
us what percentage of our capacity is being used.
4. What are the steps in capacity planning?
The steps in capacity planning are to identify the capacity requirements for the
present and future, develop capacity alternatives and evaluate capacity alternatives.
The capacity alternatives are do nothing, expand large now and expand small now
with the option to increase capacity later. We evaluate the capacity alternatives by
determining the predicted impacts on costs, profit and customer service.
5. What are decision trees, and how do they help us make better decisions?
A decision tree is a tool for determining the predicted effect of decisions given the
uncertainties of the outcomes related to each decision. They help us make better
decisions since they provide a structured, logical process for evaluating the expected
outcome given the probabilities of different outcomes.

6. Find and discuss business examples of overcapacity and undercapacity.

Overcapacity typically occurs when a university builds a new business school
building. This is because we would not want to construct the building to provide just
enough offices for the current level of faculty. We would build extra offices to
prepare for an increase in faculty in the future.
Undercapacity occurs at universities when they have to keep increasing the class sizes
since they do not have either enough faculty or classrooms to support the current
number of students.
7. Explain the consequences of poor location decisions for a business.
A poor location decision in the service industry affects the level of demand since
customers usually go to the facility to be served. A facility that is not close to or part
of a heavily populated area may not have a high level of demand. There are limits to
how far customers will travel to obtain various types of services. A poor location
decision with respect to proximity to the source of labor could cause us to have
difficulty staffing the facility. The location decision also affects our cost structure.
8. Find examples of good and bad location decisions.
It is good for restaurants to locate close to popular shopping areas, given the traffic
volume and time spent there by customers which could cause them to decide to eat
there as well. A wood furniture manufacturer has made a bad location decision if the
plant was located far from the lumber suppliers since it is expensive to transport the
lumber.
9. Describe three advantages and three disadvantages of globalization.
The advantages of globalization are the ability to take advantage of foreign markets,
the availability of cheap labor and the reduction of trade barriers. The ability to take
advantage of foreign markets is the increased potential for obtaining new customers
since there are now more countries to sell in. The availability of cheap labor can help
us reduce our costs. The reduction of trade barriers makes it easier and cheaper to
import products into other countries for sale, without opening a plant there.
The disadvantages of globalization are the risk of losing proprietary technology, poor
infrastructure, and different worker attitudes. The risk of losing proprietary
technology occurs because some countries do not regulate the use of this technology.
Poor infrastructure can cause problems regarding reliable transport of goods.
Different worker attitudes can affect tardiness, absenteeism and productivity.
10. Describe the steps used to make location decisions.

The steps for making location decisions are identify the location criteria, develop
location alternatives and evaluate location alternatives. The location criteria are the
factors we want to consider when making the decision. We develop location
alternatives by selecting potential locations that meet our criteria. Then we evaluate
the location alternatives by evaluating the ability of the locations to satisfy our criteria
overall.
11. Describe five factors that should be considered in the location decision.
The five factors that should be considered in the location decision are transportation,
community attitude, and proximity to customers, labor and sources of supply.
Transportation is the cost of moving items to and/or from the location. Community
attitude relates to the communitys support of the facility in terms of lowering
expenses to encourage it to open there and the level of desire to have the facility
there. Proximity to customers affects demand for services and transportation costs for
manufacturers. Proximity to source of labor affects the ability to find staff for the
facility. Proximity to sources of supply affects the transportation costs. Service and
manufacturing firms may place different levels of importance on each of these
factors.
12. Explain the differences among factor rating, the load-distance model, and break-even
analysis. What criteria does each method use to make the location decision?
Factor rating determines the weighted summed score for each location based on the
rating of the ability of each location to meet the factor criteria. The load-distance
model measures the frequency of movements over distance to determine which
alternative minimizes travel costs. Break-even analysis determines the level of
demand needed to cover all the costs. Factor rating can consider a variety of factors,
while the load-distance model only considers travel costs. Break-even analysis only
considers costs and demand.