Designing Optimal Capacity Planning Strategies

Question 1: Develop a minimum cost production schedule using the transportation optimization
model without and with the Guadalajara facility based on five-year forecasts.
If we consider 4 current production facilities & 6 distribution centers based on the 5 year demand
forecast, production costs, and transportation costs we can calculate minimum cost that is
incurred
Demand over 5 years = 8000 Cartons
Supply Capacity =10000 Cartons
Toronto K.C.
L.A.
Seattle
Chicago Atlanta Supply
Toronto
0.75
2.5
4.5
4.75
1.5
3
2500
K.C.
2.5
1
2.5
2.75
1.5
2.25
1500
L.A.
4.5
2.5
0.5
2.25
3.75
3
3500
Seattle
4.75
2.75
2.25
0.75
2.5
3.5
2500
Demand
1000
750
2500
1500
1500
750

By min transportation cost method, we get

Toronto
K.C.
L.A.
Seattle

Toronto
K.C.
0.75X1000
1X750

L.A.

Seattle

Chicago
Atlanta
1.5X1500

0.5X2500

3X750
0.75X1500

Total Cost without considering production cost = $8375

If we consider production cost
Toronto
K.C.
L.A.
Seattle

Toronto
K.C.
14.75X1000
19X750

Total Cost = $124625

L.A.

Seattle

13.5X2500

Chicago
Atlanta
15.5X1500
16X750

17.75X1500

Plant Utilization

Toronto
K.C.
L.A.
Seattle

Plant
Supply
Production Utilization
2500
2500
100%
1500
750
50%
3500
3250
93%
2500
1500
60%

If we consider new production facility & distribution center based on the 5 year demand forecast,
production costs, and transportation costs we can calculate minimum cost that is incurred
Demand over 5 years = 10000 Cartons
Supply Capacity =14000 Cartons
Toronto K.C.
L.A.
Seattle
Chicago Atlanta Guadalajara Supply
Toronto
0.75
2.5
4.5
4.75
1.5
3
5.25
2500
K.C.
2.5
1
2.5
2.75
1.5
2.25
3.25
1500
L.A.
4.5
2.5
0.5
2.25
3.75
3
1.75
3500
Seattle
4.75
2.75
2.25
0.75
2.5
3.5
3.75
2500
Guadalajara
5.25
3.25
1.75
2.5
3.75
3.5
0.5
4000
Demand
1000
750
2500
1500
1500
750
2000

By min transportation cost method, we get

Toronto
K.C.
Toronto
0.75X1000
K.C.
0 1X750
L.A.
0
Seattle
0
Guadalajara
0

L.A.

Seattle

0
0
0
0
0 0.5X2500
0
0
0 0.75X1500
0
0
0

Total Cost without considering production cost = $10125

If we consider production cost

Chicago Atlanta Guadalajara

0 3X750
0
1.5X750
0
0
0
0
0
2.5X750
0
0
0
0 0.5X2000

14.75X1000
0
0
0
0 17X750
0
0 19X750
0
0 20.5X750
0
0
0
0 13.5X2500
0
0
0
0
0
0
17.75X1500
0
0
0
0
0
0 19.5X750
0 10.5X2000
0
0
0
0
0
0

0
0
1000
1000
2000
0

Total Cost = $153125

Plant Utilization
Supply
Toronto
2500
K.C.
1500
L.A.
3500
Seattle
2500
Guadalajara
4000

Plant
Production Utilization
1750
70%
1500
100%
2500
71%
2250
90%
2000
50%

Question 2: Report the utilization levels by plant without and with the Guadalajara facility at years
five and 10.
If we consider 4 current production facilities & 6 distribution centers based on the 10 year demand
forecast, production costs, and transportation costs we can calculate minimum cost that is
incurred
Demand over 5 years = 10000 Cartons
Supply Capacity =10000 Cartons
Toronto K.C.
L.A.
Seattle
Chicago Atlanta Supply
Toronto
0.75
2.5
4.5
4.75
1.5
3
2500
K.C.
2.5
1
2.5
2.75
1.5
2.25
1500
L.A.
4.5
2.5
0.5
2.25
3.75
3
3500
Seattle
4.75
2.75
2.25
0.75
2.5
3.5
2500
Demand
1000
1000
3000
2000
2000
1000

By min transportation cost method, we get

Toronto
Toronto

K.C.

L.A.

Seattle

0.75X1000

Chicago

Atlanta

Supply

1.5X1500

K.C.

1X1000

L.A.

1.5X500
0.5X3000

Seattle

3X500
0.75X2000

3.5X500

Total Cost without considering production cost = $11000

If we consider production cost
Toronto
Toronto

K.C.

L.A.

Seattle

14.75X1000

K.C.

Supply

20.5X500
13.5X3000

Seattle

Atlanta

15.5X1500
19X1000

L.A.

Chicago

16X500
17.75X2000

20.5X500

Total Cost = $155500

Plant Utilization
Supply
Toronto
K.C.
L.A.
Seattle

2500
1500
3500
2500

Plant
Production Utilization
2500
100%
1500
100%
3500
100%
2500
100%

Considering maintenance cost there plant would not be running on 100% utilization levels. Thus
without the new facility we would be losing out on sales

If we consider new production facility & distribution center based on the 10 year demand forecast,
production costs, and transportation costs we can calculate minimum cost that is incurred
Demand over 10 years = 13000 Cartons
Supply Capacity =14000 Cartons
Toronto K.C.
L.A.
Seattle
Chicago Atlanta Guadalajara Supply
Toronto
0.75
2.5
4.5
4.75
1.5
3
5.25
2500
K.C.
2.5
1
2.5
2.75
1.5
2.25
3.25
1500
L.A.
4.5
2.5
0.5
2.25
3.75
3
1.75
3500
Seattle
4.75
2.75
2.25
0.75
2.5
3.5
3.75
2500
Guadalajara
5.25
3.25
1.75
2.5
3.75
3.5
0.5
4000
Demand
1000
1000
3000
2000
2000
1000
3000

By min transportation cost method, we get

Toronto
Toronto

K.C.

L.A.

Seattle

0.75X1000

K.C.

Chicago

Atlanta

Guadalajara

1.5X1500
1X1000

L.A.

1.5X500
0.5X3000

Seattle

3X500
0.75X2000

3.5X500

Guadalajara

3.5

0.5X3000

Total Cost without considering production cost = $12500

If we consider production cost
Toronto
Toronto

K.C.

L.A.

Seattle

14.75X100
0

K.C.
L.A.
Seattle
Guadalajar
a

Total Cost = $193000

Plant Utilization

Chicago

Atlanta

Guadalajar
a

15.5X150
0
19X100
0

20.5X500
13.5X300
0

16X500
17.75X200
0

20.5X50
0
10.5X3000

Supply
Production Utilization
Toronto
2500
2500
100%
K.C.
1500
1500
100%
L.A.
3500
3500
100%
Seattle
2500
2500
100%
Guadalajara
4000
3000
75%

Question 3: Use the difference in annualized system costs to perform a net present value analysis
using the planning parameters outlined in the case.

Cost
5 yr with
Guadalajara
5 yr w/o
Guadalajara
10 yr with
Guadalajara
10 yr w/o
Guadalajara

Annual
Cost

124625

45488125

153125

55890625

155500

56757500

193000

70445000

Cost
Difference

10402500

13687500

Assumption: Net Margin over COGS is 15%

Year
4
5
6
7
8
9
10

Demand Forecast
9400
10000
10600
11200
11800
12400
13000

Annual cost
difference
-0.77
3.33
-0.77
-4.87
-8.97
-13.07
-17.17

Net
Avg
Margin
Additional Additional
cost/
over
unit sold
Profit/
unit
COGS
over 9000 day
$13.55
15%
400
$5,421
$13.78
15%
1000
$13,780
$14.01
15%
1600
$22,413
$14.24
15%
2200
$31,319
$14.46
15%
2800
$40,499
$14.69
15%
3400
$49,953
$14.92
15%
4000
$59,680

Question 4: Determine the net present value for the project

Annual
additional
profit(in $
Million)
$2.37
$6.04
$9.82
$13.72
$17.74
$21.88
$26.14

It is assumed that construction would start by 2nd year and it would end by 4th year. SO based on
this we are calculating NPV.
NPV = 25.551%
Question 5: Determine the internal rate of return for the project.
It is assumed that construction would start by 2nd year and it would end by 4th year. SO based on
this we are calculating IRR.

IRR =11.29%
Calculations
Considering initial investment of new plant $30 million, Discount factor =10%
Operational Year

10

Capital
Expenditure

-30

Annual Sales
Revenue

2.37

6.04

9.82

13.72 17.74

21.88 26.14

Total Cash Flow

from operations

-30

2.37

6.04

9.82

13.72 17.74

21.88 26.14

Hurdle Rate

0.91

0.83

0.75

0.68

0.62

0.56

0.51

PV

-30

1.96

4.53

6.71

8.52

10.01

11.23 12.19

Net Present Value of the Investment

25.155

Internal Rate of Return

11.3%

Question 6: Provide the rationale for when the new plant should be constructed.

0.47

The new plant should be constructed because:

Looking at utilization capacity of all the plants with and without new facility we can find
out that if we do not go for a new plant then we would be losing out on a lot of demand.
Around 3000 cartons demand would be lost over 10 year period.
IRR > Hurdle Rate
Also as IRR is greater than Discount Rate (Hurdle Rate) 10% hence it would be profitable