DAVIS

F O U R T H E D I T I O N

AQUILANO CHASE

chapter 7

Facility Decisions: Location and Capacity

PowerPoint Presentation by Charlie Cook

The McGraw-Hill Companies, Inc., 2003

Chapter Objectives
Present a framework for evaluating alternative site locations. Identify the various factors, both quantitative and qualitative, that should be taken into consideration when selecting a location for a manufacturing or service organization. Distinguish between those factors that are important for locating a manufacturing facility and those that are important for locating a service operation. Introduce the concept of geographic information systems (GIS) as a tools for evaluating locations.
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Managerial Issues
Deciding how large, when, where and what processes to include in the construction of a facility. Understanding the different risks associated with back-of-the-house and front-of-the-house investments as they relate to customer demographics and characteristics of a given location for product manufacturing and service producing firms. Factoring the complications of globalization into location decision.

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Locating Manufacturing Facilities

Products that decrease in weight and volume during manufacturing tend to be located near the sources of raw materials. Products that increase in weight and volume during manufacturing tend to be located near the consumers.

One site cost disadvantage such as transportation may be offset by a cost savings advantage specific to the site such as low labor costs.
A location analysis should consider both qualitative and quantitative factors

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Qualitative Location Factors

Local Infrastructure
Institutional (e.g., reliable electrical power grid) Transportational (e.g., railway systems)

Worker Education and Skills

Education and skills of local workers.

Product Content Requirements

The minimum percentage of product that must be produced in a country in order for the product to be sold in that country.

Political/Economic Stability
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Comparison of 1995 Hourly Wages for Manufacturing Workers

Source: Bureau of Labor Statistics, September 7, 2000.

Exhibit 7.1
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Quantitative Location Factors

Labor Costs
Labor costs vary dramatically, depending on location. Cheap labor often lacks needed education and skills.

Distribution Costs
Distance and the time required to deliver products can offset lower location costs.

Facility Costs
Special economic zones (SEZ)
Duty-free areas established to attract foreign investment in the form of manufacturing facilities.
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Quantitative Location Factors

Exchange Rates
Variations in rates can have a significant effect on sales and profits.

Tax Rates
Taxes vary considerably between countries and within countries. All forms of taxes should be considered (property, payroll, inventory, and investment taxes).

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Customer Requirements and Location Strategies for Service Organizations

Source: Adapted from Hal Reid, Retailers Seek the Unique, Business Geographics 5, no. 2 (February 1997), pp. 3235.

Exhibit 7.2
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Computer Programs for Site Selection

Geographic Information Systems (GIS)
Computer tool that assesses alternative locations for service operations. Provides a birds eye view of a particular region of interest.

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Distribution of a Banks Housing Loans in an Area

Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Exhibit 7.3a
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Distribution of Sales for Regional Mall by Area

Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Exhibit 7.3b
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Demand for Health Care in a Region and the Services That Are Available

Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Exhibit 7.3c
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Types of Service Facilities

Facilities with a Direct Interface with the Customer
Brick and mortar facilities (front-of-the-house) that require the customer to be present.

Facilities with Indirect Customer Contact

Services that link only indirectly with the customer who is not required to be present.

Facilities with No Customer Contact

Back-of-the-house operations that are involved with the processing and distribution of goods.

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Evaluating Potential Locations

Factor Rating System
1. Identify the specific criteria or factors to be considered. 2. Assign a weight to each factor. 3. Select a common scale for rating each factor. 4. Rate each potential location on each of the factors. 5. Multiply each factors score by its weight. 6. Sum the weighted scores and select the location with the highest score.

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Factor-Rating System Example

The Low-Credit Card Interest Bank
Factor
Size and education of workforce within 15 miles Availability of part-time workers (students) Distance to telecommunication infrastructure Distance to higher education facilities Cost of living index Cultural amenities Crime statistics Totals Weight 20 10 25 5 15 10 15 100 Rating Site A 60 45 80 50 85 65 95 Rating Site B 75 20 90 35 80 40 90 Score Site A 1,200 450 2,000 250 1,275 650 1,425 7,250 Score Site B 1,500 200 2,250 175 1,200 400 1,350 7,075

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Evaluating Potential Locations

Center of Gravity Method
Used to determine the optimal location of a facility based on minimizing the transportation costs between where the goods are produced and where they are sold or redistributed. Locate each existing operation on an X and Y coordinate grid map. Calculate X coordinate of center of gravity Calculate Y coordinate of center of gravity

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Center of Gravity Formulas

d V ix i Cx V i

d iy V i Cy V i

Cx = X coordinate of the center of gravity Cy = Y coordinate of the center of gravity

dix = X coordinate of the ith location

diy = Y coordinate of the ith location Vi = Volume of goods transported to the ith location
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Grid Map of Ye Old Bake Shoppes Retail Locations

Exhibit 7.4
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Factors Affecting Capacity Decisions

External Factors
Government regulations Union agreements Supplier capabilities

Internal
Product and service design Personnel and jobs Plant layout and process flow Equipment capabilities and maintenance Materials management Quality control systems Management capabilities
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Capacity Decisions
Production System Capacity Affects:
Response rate to market changes Overall product cost structure Composition of the workforce Level of production technology utilized Extent of management and staff support General inventory strategy

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Important Capacity Concepts

Balancing Capacity and Demand
Demand exceeds capacity, customers are turned away. Demand exceeds optimum capacity, customers receive poor service. Demand equals optimum capacity, customers are service properly. Demand is less than optimum capacity, there is idle capacity
Too much capacitycosts rise. Too little capacitycustomers are lost.
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Comparing Capacity and Demand in a Service Operation

Source: Adapted from Christopher Lovelock, Strategies for Managing Capacity -Constrained Services, Managing Services: Marketing, Operations Management and Human Resources, 2nd ed. (Englewood Cliffs, NJ: Prentice Hall, 1992).

Exhibit 7.5
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Important Capacity Concepts

Best Operating Level
The capacity (production volume) for which the average unit cost of output is at a minimum.

Economies of Scales
The output range in which average units costs decrease as unit production volumes increase.

Diseconomies of Scale
The output range in which average unit costs rise due to added costs incurred at operating levels exceeding the best operating level.

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Economies of Scale

Exhibit 7.6
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Important Capacity Concepts

Capacity Flexibility
Ability to provide a wider range of products and volumes with short lead times.
Flexible plants Flexible workers Subcontracting Flexible processes Use of External Capacity Sharing capacity

Agile Manufacturing
The capability of a manufacturing process to respond quickly to marketplace changes.

Capacity Balance
Balanced internal operational capacities
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Strategies for Adding Capacity: Proactive Strategy

Exhibit 7.7a
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Strategies for Adding Capacity: Neutral Strategy

Exhibit 7.7b
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Strategies for Adding Capacity: Reactive Strategy

Time
Exhibit 7.7c
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Capacity Planning
Capacity Planning
Determining which level of capacity to operate at to meet customer demand in a cost efficient manner. 1. Forecast sales for each product line. 2. Forecast sales for individual products within each line. 3. Calculate labor and equipment requirements to meet product line forecasts. 4. Project labor and equipment availabilities over the planning horizon.
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Capacity Measures
Capacity
The output of a process or facility over a given time period.

Capacity Utilization
The percentage of the available capacity that is actually being used.

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Plant Location Matrix

Exhibit 7.8
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Quantity of Compressors Required at Each Plant

Exhibit 7.9
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