Unit 8

Facility
Location

Capacity Planning and Facility

Location and Aggregate Planning
 Challenges in Defining and Measuring Service

• Service Complexity: Uncovering what service truly entails and how to measure it
remains a challenge for managers.
• Customer Perception: How customers perceive service directly impacts their future
purchasing decisions.

Understandin Anticipating Customer Demand

• Critical Step: To provide effective service, management must anticipate the level and

g Service and
nature of customer demand.
• Example: Airlines must predict demand to allocate resources efficiently (e.g.,
purchasing aircraft and supporting staff).

Demand in a
• Impact: Low demand affects profits, while high demand may lead to customer
dissatisfaction.

Competitive Service vs. Product Inventory

• Inventoried Services: Unlike tangible products, services are often intangible and

World consumed simultaneously.

• Exceptions: Emergency services (e.g., fire engines) can be inventoried for immediate
use.
• Product Bundling: Most product offerings include bundled services (e.g., car
purchase with financing and trade-in).

Managing Services Differently

• Manufactured Products: Sold “off the shelf” with organized production and
inventory management.
• Services: Cannot be managed similarly; real-time adjustments are necessary to meet
demand.
 Upon completion of this unit you will be able to:

· Outline how capacity is measured and appreciate the dilemma faced by

management in matching variable demand with variable capacity.

· Calculate various aggregate planning scenarios.

Outcome · Discuss the strategic planning process.

s · Identify various strategies for balancing supply with demand.

· Evaluate the application of yield management.

· Discuss flexibility.

· Appreciate the customers psychology in relation to queuing.

· Discuss queues and waiting lines.

©2020 John Wiley & Sons, Inc. All rights reserved. 3

Definitions
1. Aggregate Planning
• Definition: Aggregate planning is the process
used to develop tactical plans that support the
organization’s business plan.
• Hierarchy: It follows strategic capacity planning
and precedes short-term capacity planning.
• Scope: Performed for families or groups of
products.
• Components:
• Total Sales and Production Plans: Analyzing
plans for overall sales and production.
• Targeted Inventory and Customer Backlog:
Balancing supply and demand.
• Outcome: The production plan.
2. Capacity Management
• Capacity: Capability to produce output over a
specific time period.
• Capacity Required: Process capability needed for
product or service delivery.
• Measurement: Short, medium, and long term.
• Capacity Planning: Determines the necessary
capacity to meet market demand.
3. Chase Capacity Strategy
• Method: Varies production to match
demand.
• Resource Adjustment: Add or remove
resources as needed.
• Result: Maintains stable inventory or
backlog.
• Suitability: Ideal for firms facing
significant demand fluctuations.
4. Demand Management Strategy
• Objective: Modify demand to align with
available capacity.
• Application: Used alongside level
capacity or chase capacity strategies.
• Methods: Pricing, off-peak promotions,
restricted peak service, reservations, and
appointments.
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Definitions
1. Diseconomies of Scale
• Definition: Occurs when further increases
in facility size no longer reduce average
unit costs.
• Challenges: Coordinating material flows
and personnel becomes expensive.
• Solution: Seek new sources of capacity.
2. Economies of Scale
• Definition: Average cost per unit
decreases as the plant size grows.
• Benefit: Each succeeding unit absorbs
part of fixed costs.
• Relevance: Crucial for capacity decisions.
• Optimal Capacity: Achieve the minimum
average unit cost.
3. Level Production Strategy
• Method: Maintain resources at a constant level.
• Result: Steady production rate.
• Suitability: Ideal for firms with scarce or expensive
resources.
• Stock Building: Useful for anticipating seasonal
demand.
4. Master Production Schedule (MPS)
• Purpose: Reflects the anticipated build schedule for
items assigned to the master scheduler.
• Driven by: Planning numbers derived from MPS
guide material requirements planning.
• Specifics: Includes product configurations,
quantities, and dates.
5. Master Schedule
• Overview: Report showing forecast, customer
orders, available balances, and more.
• Considerations: Backlog, capacity, material
availability, and management policies.
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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 capital and when to spend it for additional
facilities and equipment.
• Tactical issues: workforce and inventory levels; day-to-day use of
equipment.
Measuring Capacity

• There is no one best way to measure capacity.

• Output measures like kegs per day are easier to understand.
• With multiple products, input measures work better.
TABLE 9.1 Examples of Different Capacity Measures
Type of Business Input Measures of Capacity Output Measures of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds per month Number of patients per month
Pizza parlor Worker hours per day Number of pizzas per day
Ice-cream Operational hours per day Gallons of ice cream per day
manufacturer
Retail store Floor space in square feet Revenues per day

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Capacity: Two Types of Information

1. Amount of available capacity.

• Understand how much capacity the facility has
2. Effectiveness of capacity use.
• How effectively we are using the available capacity
Measuring Available Capacity

Design capacity Effective capacity

Maximum output rate under ideal conditions. Maximum output rate under normal (realistic)
A bakery can make 30 pies per day when pushed conditions; usually lower than design capacity.
at holiday time. On the average, this bakery can make 20 pies per
day.
Measuring Effectiveness of Capacity Use

• Capacity Utilization
• Measures how much of the available capacity (%) is actually being
used.
actual output rate
Utilization = 100%
capacity

o Measures effectiveness.
o Use either effective or design capacity in denominator.

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Example: Computing Capacity Utilization
A bakery’s design capacity is 30 pies per day and effective capacity is 20 pies
per day. Currently the bakery is producing 28 pies per day. What is the
bakery’s capacity utilization relative to both design and effective capacity?
actual output 28
Utilizationeffective = (100%) = (100%) = 140%
effective capacity 20
actual output 28
Utilizationdesign = (100%) = (100%) = 93%
design capacity 30
• The current utilization is only slightly below the bakery’s design capacity
and considerably above its effective capacity.
• The bakery can operate at this level for a only short period of time.

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Capacity Considerations

The best operating level is the output Economies of Scale:
that results in the lowest average unit
cost.
the cost per unit of output drops as volume of
output increases
spread the fixed costs of buildings and equipment
over multiple units; allow bulk purchasing and
handling of material
Diseconomies of Scale:
the cost per unit rises as volume increases
often caused by congestion (overwhelming the
process with too much work-in-process) and
scheduling complexity
Best Operating Level and Size

FIGURE 9.1 Different operating FIGURE 9.2 Best operating levels as functions
levels of a facility of facility size

• When expanding capacity, there are two alternatives:

1. Purchase one large facility, requiring one large initial investment.
2. Add capacity incrementally in smaller chunks as needed.

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Other Capacity Considerations

Focused factories: small, specialized facilities with Subcontractor networks

limited objectives; e.g., The Limited (Limited Too).

Plant within a plant (PWP): segmenting larger operations into smaller Outsource non-core items to free up capacity for what you do well;
operating units with focused objectives. fast-growing trend today.
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.
 1. Identifying Capacity Requirements

Forecasting capacity Capacity cushions Strategic implications

Long-term capacity Plan for added capacity to How much capacity a
requirements based on future provide flexibility. competitor might have.
demand. Potential for overcapacity in
Identifying future demand industry a possible hazard.
based on forecasting.
Forecasting, at this level, relies
on qualitative forecast models
(executive opinion and Delphi
method).
Forecast and capacity decision
includes strategic implications.
2. Developing Capacity Alternatives

• Capacity alternatives include:

1. do nothing
2. expand large now (may include capacity cushion)
3. expand small now with option to add later
3. Evaluating Capacity Alternatives

• Use decision support aids to evaluate decisions.

o A decision tree is the most popular.
• Managers need to use many different inputs and judgment.
Decision Trees

Diagramming trees contain the following:

o Decision points – points in time when decisions are made,
represented by squares called “nodes”.
o Decision alternatives – branches or arrows leaving a decision
point (node).
o Chance events – events that could affect a decision,
represented by branches or arrows leaving circular chance
nodes.
o Outcomes – each possible alternative listed.
Decision Tree Diagrams

• Decision trees are developed by:

o drawing from left to right
o using squares to indicate decision points
o using circles to indicate chance events
o writing the probability of each chance beside the chance (sum
of associated chances = 100%)
o writing each alternative outcome in the right margin
Example: Using Decision Trees

A restaurant owner has determined that she needs to expand her facility.
Alternatives are to expand to a large facility 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?

FIGURE 9.3 Decision tree for

Anna’s restaurant

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Evaluating the Decision Tree

• Utilizes expected value (EV) analysis.

• EV is a weighted average of chance events.
o Probability of occurrence × chance event.
• Refer to Figure 9.3, shown in previous slide.
o At decision point 2, choose to expand to maximize profits
($200,000 > $150,000).
o Calculate EV of small expansion:
• EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000
Evaluating the Decision Tree, Continued

• Calculate EV of large expansion:

o EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000
• At decision point 1, compare alternatives and choose the
large expansion to maximize the expected profit:
o $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!
Unit 9

Location
Location Decisions in Organizations
1. Integral Strategic Process
1. Location decisions are crucial for every organization.
2. Existing companies often face significant stakes in location choices.
2. Multiple Levels of Impact
1. National Level: Retail analysts select markets for new store entry.
2. Metropolitan Level: Prime retail sites and optimal distribution matter.
3. Non-Manufacturing Operations: Convenience for customers.
4. Manufacturing and Non-Manufacturing: Impact on operating costs and profit.
3. Procedure for Decision-Making
1. Identify evaluation criteria (e.g., cost reduction, increased revenues).
2. Consider factors like raw material accessibility, proximity to consumers, and transportation
costs.
3. Generate location options based on resource availability and cultural factors.
4. Evaluate options using cost-profit-volume analysis
4. Definition of Plant and Location:
1. Plant: Refers to any business setup engaged in production operations, yielding semi-finished or
finished goods.
2. Location: Represents the place or region where the setup or concern is situated.
5. Purpose of Plant Location Decisions:
1. Managers make these decisions to select an optimal location for their intended plant.
2. Factors considered include labor supply, raw materials availability, and proximity to the
market.
3. One is that they entail a long-term commitment, which makes mistakes difficult to overcome.
4. The other is that location decisions often have an impact on investment requirements,
operating costs and revenues, and operations itself.
Objectives and
Need for Location
Decision
• Objective of Location Decisions:
• Profit-oriented organizations prioritize profit potential.
• Nonprofit organizations balance cost and consumer service.
• Identifying the best location isn’t always straightforward.
• Numerous acceptable locations exist, avoiding reliance on a
single “best” choice.
• Organizations aim to avoid future problems in location
selection.
• The Need for Location Decisions:
• Market Expansion: Organizations like banks, fast food chains,
and retail stores seek locations to expand their markets.
• Demand Growth: When existing locations can’t meet
increased demand, adding new locations becomes necessary.
• Depletion of Resources: Fishing, logging, and mining
operations relocate due to resource exhaustion.
• Market Shifts and Cost Considerations: Changing markets or
cost dynamics prompt relocation decisions.
Phases of Plant Location
Theory

•Phases of Plant Location Theory

• Plant location theory can be considered to have passed though four phases:
• 1. The Least Production Cost Site phase: In this phase interests were
concentrated on location factors directly affecting cost of production.
• 2. The Nearness of Market phase. In this phase more realistic concepts are
introduced, such as the effect of uneven population, uneven resource
distribution, imperfect competition and the independence of firms within a
multi-market economy.
• 3. The Profit Maximization phase. This phase stressed that the firm’s optimum
location was determined by the difference between total revenue and total cost.
• 4. The Least Costs to Customer phase. This is similar to the profit maximization
phase, but decision data were related to delivered costs to customers. Greater
emphasis is given on analytical models, such as linear programming models and
delivery time to customers.
The Nature of Location
Decision Options

•Location decisions for many types of business are made frequently, the usual objectives managers have when making
location choices, and some of the options that are available to them. Manager can consider four options in location
planning.
•
•a) One is to expand an existing facility. This option can be attractive if there is adequate room for expansion, especially if the
location has desirable features that are not readily available elsewhere. Expansion costs are often less than those of other
alternatives.
•
•b) Another option is to add new locations while retaining existing ones, as is done in many retail operations. In such cases, it
is essential to take into account what the impact will be on the total system. Opening a new store in a shopping mall may
simply draw customers who already patronize an existing store in the same chain rather than expand the market. On the
other hand, adding locations can be a defensive strategy designed to maintain a market share or to prevent competitors
from entering a market.
•
•c) A third option is to shut down at one location and move to another. An organization must weigh the costs of a move and
the resulting benefits against the costs and benefits of remaining at the existing location. A shift in markets, exhaustion of
raw materials, and the cost of operations often cause firms to consider this option seriously.
•
•d) Finally, organizations have the option of doing nothing. If a detailed analysis of potential locations fails to uncover
benefits that make one of the previous three alternatives attractive, a firm may decide to maintain the status quo, at least
for the time being.
Effects of Location on Revenue and Costs
Reason for Changing Locations

a. Effects of location on revenues: • Changes in resources may occur. The cost or availability of labor, raw
materials, and supporting resources (such as subcontractors) may
b. Effects of location on fixed costs: change. The type of labor available may also change from skilled to
c. Effects of location on variable costs: semi-skilled;

• Inputs like raw materials, technological availability may also change

over time.

• The geography of demand may shift. As product markets change, it

may be desirable to change facility location to provide better service to
customers. The facility should be with customers. If the consumer
market changes then it is desirable that the facility changes its location.

• Companies may merge, making facilities redundant. To prevent

overlapping of efforts some facilities may become useless and need to
be streamlined. As a result some facilities are reduced in capacity or
even permanently shut down.

• New products may be introduced, changing the availability of resources

and markets. Technological changes in the methods of production can
cause a location to become less attractive.

• Political and economic conditions may change. This intangible reason

plays a major role in our country.
Factors
Affecting
Location
Decision
Major steps necessary in the overall location strategy

Development of the major

. Isolation of pertinent
objectives of the firm
variables affecting the choice
necessitating location selection
of location.
by the management.

Development of accurate and Design for the location system

timely information on each of with detailed timetable for
the variables selected in step 2 implementation.

Completing the location move

in an effective and efficient
manner by review, testing and
feedback control