Chapter 5 Capacity and Location Planning

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Chapter 5

  • Capacity and Location Planning


Burger King

  • Highly variable demand

  • During lunch hour, demand can increase from 40 to 800 hamburgers/hour

  • Limited in ability to used inventory

  • Facilities designed for flexible capacity

  • During off peak times drive through staffed by one worker

Burger King continued

  • During lunch hour drive through staffed by up to five workers who divide up the duties

  • Second window can be used for customer with special orders

  • Average transaction time reduced from 45 to 30 seconds

  • Sales during peak periods increased 50%

Burger King continued

  • Payroll costs as large as food costs

  • Need to keep costs low but at same time meet highly variable demand

  • BK-50 restaurant is 35% smaller and costs 27% less to build, but can handle 40% more sales with less labor

Semiconductor Industry

  • Learning from the steel industry

  • Both industries require large and expensive factories

  • 1980s steel industry started to abandon economies of scale justification and built minimills

  • Chipmakers are now constructing smaller and more automated wafer fabs

Semiconductor Industry continued

  • Short life cycles make it difficult to recoup $2 billion it will cost to build wafer fab in 1998

  • Payback time is 22-30 month to conventional wafer fab versus 10 months for minifab

  • Processing time can be reduced from 60-90 days to 7 days.


  • Early 1990s investigated feasibility of producing luxury sports utility vehicle

  • Project team established to find location for new plant

  • Team charged with finding plant outside of Germany

  • Team initially narrowed search to North America

Mercedes-Benz continued

  • Team determined that North America location would minimize combined labor, shipping, and components cost

  • Plans indicated production volume of 65,000 vehicles per year and a breakeven volume of 40,000 vehicles

  • Sites further narrowed to sites within US

  • Close to primary market

Mercedes-Benz continued

  • Minimize penalties associated with currency fluctuations

  • 100 sites in 35 state identified

  • Primary concern was transportation cost

  • Since half production was for export, focused on sites close to seaports, rail lines, and major highways

Mercedes-Benz continued

  • Worker age and mix of skills also considered

  • Sites narrowed to sites in NC, SC, and AL

  • These sites relatively equal in terms of business climate, education level, transportation, and long-term costs

  • AL chosen due to perception of high dedication to the project

Geographic Information Systems

  • View and analyze data on digital maps

  • Retail store in WI analyzed sales data on a map

  • The map demonstrated that each store drew majority of sales from 20 mile radius

  • Map highlighted area where only 15% of potential customers had visited one of its stores

Sport Obermeyer

  • Highly volatile demand

  • Combined costs of stockouts and markdowns can exceed manufacturing costs

  • Determine which items can and cannot be predicted well

  • Products that can be predicted produced furthest in advance

  • Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s


  • Capacity planning applies to both manufacturing and service organizations

  • Capacity options can be categorized as short-term or long-term

    • Changing staffing level is short-term
    • Building new minifab is long-term

Insights continued

  • Semiconductor industry illustrates the enormous cost often associated with expanding capacity

  • Shorter product life cycles add further complications

  • Volatile demand can further complicate capacity planning


  • Capacity needs determined on the basis of forecast of demand.

  • In addition to determining capacity needed, the location of the capacity must also be determined.

  • Mercedes-Benz example illustrates that location decisions are often made in stages.

Sport Obermeyer

  • Highly volatile demand

  • Combined costs of stockouts and markdowns can exceed manufacturing costs

  • Determine which items can and cannot be predicted well

  • Products that can be predicted produced furthest in advance

  • Increased its sales of fashion skiwear 50% to 100% over 3 year period in 1990s

Forecasting Purposes and Methods

Primary Uses of Forecasting

  • To determine if sufficient demand exists

  • To determine long-term capacity needs

  • To determine midterm fluctuations in demand so that short-sighted decisions are not made that hurt company in long-run

  • To determine short-term fluctuations in demand for production planning, workforce scheduling, and materials planning

Forecasting Methods

  • Informal (intuitive)

  • Formal

    • Quantitative
    • Qualitative

Forecasting Methods

Qualitative Methods

  • Life cycle

  • Surveys

  • Delphi

  • Historical analogy

  • Expert opinion

  • Consumer panels

  • Test marketing

Quantitative Methods

  • Causal

    • Input-output
    • Econometric
    • Box-Jenkins
  • Autoprojection

    • Multiplicative
    • Exponential smoothing
    • Moving average

Choosing a Forecasting Method

  • Availability of representative data

  • Time and money limitations

  • Accuracy needed

Long-Term Capacity/Location Planning


  • Maximum rate of output of the transformation system over some specified duration

  • Capacity issues applicable to all organizations

  • Often services cannot inventory output

  • Bottlenecks

  • Yield (or revenue) management

Long-term Capacity Planning

  • Unit cost as function of facility size

  • Economies of scale

  • Economies of scope

Envelope of Lowest Unit Output Costs with Facility Size

Demand and Life Cycles for Multiple Outputs

  • Demand Seasonality

  • Output Life Cycles

Anti-cyclic Product Sales

Forecast of Required Organizational Capacity from Multiple Life Cycles

Timing of Capacity Increments

Location Planning Strategies

Capabilities and the Location Decision

  • Often driven too much by short-term considerations

    • wage rates
    • exchange rates
  • Better approach is to consider how location impacts development of long-term capabilities

Six Step Process

  • Identify sources of value

  • Identify capabilities needed

  • Assess implications of location decision on development of capabilities

  • Identify potential locations

  • Evaluate locations

  • Develop strategy for building network of locations

Stage 1: Regional-International

  • Minimize transportation costs and provide acceptable service

  • Proper supply of labor

  • Wage rates

  • Unions (right-to-work laws)

  • Regional taxes, regulations, trade barriers

  • Political stability

Stage 2: Community

  • Availability of acceptable sites

  • Local government attitudes

  • Regulations, zoning, taxes, labor supply

  • Tax Incentives

  • Community’s attitude

  • Amenities

Breakeven Location Model

Stage 3: Site

  • Size

  • Adjoining land

  • Zoning

  • Drainage

  • Soil

  • Availability of water, sewers, utilities

  • Development costs

Weighted Score Model

  • Wi = importance of factor i

  • Si = score of location being evaluated on

  • factor i

  • i = an index for the factors

Locating Pure Service Organizations

  • Recipient to Facility

    • facility utilization
    • travel distance per citizen
    • travel distance per visit
  • Facility to Recipient

Short Term Capacity Planning

Bottlenecks in Sequential Operations

Efficiency and Output Increase when Machines are Being Added

Product and Service Flows

Process Flow Map for a Service

Implementing the Theory of Constraints

  • Identify the system’s constraints

  • Exploit the constraint

  • Subordinate all else to the constraint

  • Elevate the constraint

  • If constraint is no longer a bottleneck, find the next constraint and repeat the steps.

Relationship between Capacity and Scheduling

  • Capacity is oriented toward the acquisition of productive resources

  • Scheduling related to the timing of the use of resources

Gantt Charts for Capacity Planning and Scheduling (Infeasible)

Gantt Charts for Capacity Planning and Scheduling (Feasible)

Short-Term Capacity Alternatives

  • Increase resources

  • Improve resource use

  • Modify the output

  • Modify the demand

  • Do not meet demand

Increase Resources

  • Overtime

  • Add shifts

  • Employ part-time workers

  • Use floating workers

  • Subcontract

Improve Resource Use

  • Overlap or stagger shifts

  • Schedule appointments

  • Inventory output

  • Backlog demand

Modify the Output

  • Standardize the output

  • Have recipient do part of the work

  • Transform service operations into inventoriable product operations

  • Cut back on quality

Demand Options

  • Modify the Demand

    • change the price
    • change the promotion
  • Do Not Meet Demand

Capacity Planning for Services

  • Large fluctuations in demand

  • Inventory often not an option

  • Problem often is to match staff availability with customer demand

  • May attempt to shift demand to off-peak periods

  • Can measure capacity in terms of inputs

The Learning Curve


  • In airframe manufacturing industry observed that each time output doubled, labor hour per plane decreased by fixed percentage

Learning Curve Function

  • M = mNr

  • M = labor-hours for Nth unit

  • m = labor-hours for first unit

  • N = number of units produced

  • r = exponent of curve

  • = log(learning rate)/0.693

Typical Pattern of Learning and Forgetting

Queuing and the Psychology of Waiting

Waiting-Line Analysis

  • Mechanism to determine several key performance measures of operating system.

  • Trade-off two costs

    • cost of waiting
    • cost of service

Waiting Line Analysis

Principles of Waiting

  • Unoccupied time feels longer than occupied time.

  • Pre-service waiting feels longer than in-service waiting.

  • Anxiety makes waiting seem longer.

  • Uncertain waiting is longer than known, finite waiting.

Principles of Waiting continued

  • Unexplained waiting is longer than explained waiting.

  • Unfair waiting is longer than fair waiting.

  • Solo waiting is longer than group waiting.

  • The more valuable the service, the longer it is worth waiting for.

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