FACILITY CAPACITY, LOCATION, And LAYOUT : "Production Capacity" And "Sustainable Practical Capacity"

CHAPTERCHAPTER 55

Facility Capacity, Location, and Layout

Long-Range Capacity Facility Location Manufacturing Facility Layouts Analyzing Manufacturing Facility Layouts Service Facility Layouts 64 CHAPTER 5

REVIEWs

CAPACITY PLANNING Facility planning includes: 1. determining how much long-range production capacity is needed 2. determining when additional capacity is needed 3. determining where the production facilities should be located 4. determining the layout and characteristics of the facilities

Reasons why facility-planning decisions are crucial to a company: 1. the capital investment is enormous 2. the long-range strategies are embodied in a firm's facility plans 3. the operating efficiency of operations is dependent on the capacity of the facilities

Four activities involved in capacity planning decisions: 1. estimating the capacities of the present facilities 2. forecasting the long-range future capacity needs for all products and services 3. identifying and analyzing sources of capacity to meet future capacity needs 4. selecting from among the alternative sources of capacity.

Definition of "production capacity" and "sustainable practical capacity": 1. production capacity -- the maximum production rate of an organization 2. sustainable practical capacity -- that output attained within the normal operating schedule of shifts per day and days per week without bringing in high cost inefficient facilities

Factors that make planning for future capacity needs difficult to do: 1. fundamental changes in the economy 2. changes in consumer preferences 3. technological developments 4. demographic shifts 5. changes in government regulations 6. political and military events

Four steps in forecasting production capacity: 1. the total demand for a particular product or service from all producers is estimated 2. the market share for a single company is estimated 3. the market share is multiplied times the total demand to obtain estimated demand for a single company 4. product or service demand is translated into capacity needs

A capacity cushion provides: 1. extra capacity in case more demand than expected occurs 2. the ability to satisfy demand during peak demand seasons 3. lower production costs 4. product and volume flexibility FACILITY CAPACITY, LOCATION, and LAYOUT 65

5. improved quality of products and services The concept of "time-phasing" of products is: 1. a strategy that can be used to maintain high facility utilization 2. as one product enters the declining phase of its life-cycle, a new product is developed to use the capacity made available by the older product's decline.

Ways to expand long-range capacity: 1. subcontract with other companies 2. acquire other companies, facilities, or resources 3. develop sites, build buildings, buy equipment 4. expand, update, or modify existing facilities 5. reactivate facilities on standby status

Ways to reduce long-range capacity: 1. sell off existing facilities, sell inventories, and lay off or transfer employees 2. mothball facilities and place on standby status, sell inventories, and lay off or transfer employees 3. develop and phase in new products as other products decline

Concept of “economies of scale”: 1. as the volume of outputs in a facility increases to the best operating level, the average unit costs fall 2. this is because fixed costs are spread across more and more units

Concept of “best operating level”: 1. the volume of outputs in a facility where the least average unit cost occurs

Concept of “diseconomies of scale”: 1. As the volume of outputs in a facility increases beyond the best operating level, average unit costs rise 2. this is because of increased congestion of materials and workers

Two general approaches to expanding long-range capacity: 1. invest heavily in one large facility that requires a large initial investment, but one that has a higher best operating level and that ultimately will fulfill the capacity needs of the firm (build now and grow into it) 2. plan to invest in an initial facility design now and expand or modify that facility as needed to raise the best operating levels to meet the long range demand for products and services (expand incrementally as needed)

Concept of “subcontractor networks”: 1. parent manufacturer develops long-range contractual relationships with suppliers of parts, components, and assemblies 2. this allows parent manufacturer to operate with less capacity within its own facilities 3. this requires less capital of the parent manufacturer for production facilities 4. this allows parent manufacturer to more easily vary capacity during peak or slack periods of demand 66 CHAPTER 5

5. disadvantage is parent manufacturer can become vulnerable to subcontractors’ capacity shortages Concept of "outsourcing service functions": 1. another way that companies can increase their capacity to run their business as their demand grows 2. current functions include janitorial/building maintenance, temporary staffing, travel arrangements, desktop computer supply/maintenance, information system maintenance, moving/storage, delivery, advertising, and payroll 3. future functions include: customer service, bookkeeping, telemarketing, mailroom, product design, data processing, sales representation, and benefits administration

Concept of "economies of scope": 1. the ability to produce many product models in one highly flexible production facility more cheaply than in separate production facilities 2. programmable automation allows production systems to change to other products quickly and inexpensively 3. cost of automated facility is spread over many product lines

Major benefits of using decision tree analysis for capacity planning decisions: 1. a way of structuring complex multiphase decisions by mapping decisions from the present to the future 2. a direct way of dealing with uncertain events 3. an objective way to determine the relative value of each decision alternative

FACILITY LOCATION Sequence of decisions that typically take place when a manufacturing facility location is being selected: 1. national decision -- whether the facility will be located internationally or domestically 2. regional decision -- which particular region within a given country or nation 3. community decision -- which community in the region 4. site selection -- the specific location

Major factors in making a regional facility location decision: 1. customer or constituent concentrations and trends 2. labor availability and costs 3. degree of unionization 4. construction and land costs 5. utilities supply and costs 6. transportation system availability 7. transportation costs 8. materials and supplies availability and costs 9. climate 10. government incentives 11. environmental regulations

Additional factors involved in facility location decisions: 1. data 2. politics 3. incentives FACILITY CAPACITY, LOCATION, and LAYOUT 67

4. preemptive tactics Dominant factors affecting location decisions: 1. proximity to concentration of customers or constituents 2. labor availability and costs 3. attractiveness of community for recruiting professionals 4. degree of unionization 5. construction and land costs 6. proximity to transportation facilities 7. incoming transportation costs 8. outgoing transportation costs 9. utilities availability and costs 10. proximity to raw materials and supplies 11. zoning restrictions and environmental impact

Five steps in analyzing service facility location decisions: 1. consumer behavior research 2. market research 3. data gathering for each location alternative 4. revenue projections for each location alternative 5. profit projections for each location alternative

Qualitative factors that must be considered in facility location decisions: 1. housing 2. cost of living 3. availability of labor 4. climate 5. community activities 6. education and health services 7. recreation 8. churches 9. union activities 10. local transportation systems 11. proximity of similar industrial facilities 12. community attitudes

FACILITY LAYOUT

Facility layout includes: 1. planning for the location of all machines, utilities, employee workstations, customer service areas, material storage areas, aisles, restrooms, lunchrooms, drinking fountains, internal walls, offices and computer rooms 2. planning for the flow patterns of materials and people around, into, and within buildings

Central focus of most manufacturing facility layouts: 1. to minimize the cost of processing, transporting, and storing materials throughout the production system 68 CHAPTER 5

A materials-handling system is: 1. the entire network of material transportation 2. it receives materials 3. it stores materials in inventories 4. it moves materials about between processing points within and between buildings 5. it finally deposits the finished products into vehicles that will deliver them to customers

Objectives for manufacturing operation layouts: 1. provide enough production capacity 2. reduce materials-handling costs 3. conform to site and building constraints 4. allow space for production machines 5. allow high labor, machine, and space utilization and productivity 6. provide for volume and product flexibility 7. provide space for restrooms, cafeterias, and other personal-care needs of employees 8. provide for employee safety and health 9. allow for ease of supervision 10. allow for ease of maintenance 11. achieve objectives with least capital investment

Seven principles of materials-handling: 1. materials should move in direct flow patterns, minimizing zigzagging or backtracking 2. related production processes should be arranged to provide for direct material flows 3. mechanical materials-handling devices should be designed and located and storage locations selected so that human effort is minimized 4. heavy or bulky materials should be moved the shortest distance 5. the number of times each material is moved should be minimized 6. systems flexibility should allow for unexpected situations 7. mobile equipment should carry full loads at all times

Some types of materials-handling equipment: 1. automatic transfer devices 2. containers and manual devices 3. conveyors 4. cranes 5. elevators 6. pipelines 7. turntables 8. trucks 9. automated guided vehicle systems

Four basic types of manufacturing layouts: 1. process layout -- for producing a variety of custom products in relatively small batches 2. product layout -- for producing a few standardized products in relatively large quantities FACILITY CAPACITY, LOCATION, and LAYOUT 69

3. cellular manufacturing layout -- machines are grouped into cells, and the cells function somewhat like a product layout island within a larger process layout 4. fixed-position layout -- for working on a product that is very bulky, large, heavy, or fragile with workers, materials, and machines transported to and from the product Differences in machines between process and product layouts: 1. process layouts -- typically use general-purpose machines that can be changed over rapidly to new operations for different product designs 2. product layouts -- typically use specialized machines that are set up once to perform a specific operation for a long period of time on one product

Nature of manufacturing cells: 1. most applications are in metalworking production 2. cells are usually formed by taking production of parts from an existing job shop 3. the percentage of parts produced in cells is a relatively small percentage of the total production 4. both small and large firms use manufacturing cells 5. moderate batch sizes of parts are produced in cells 6. the number of cells is relatively small 7. the number of production machines per cell is relatively small 8. there are relatively few workers within cells

Potential benefits from using a cellular manufacturing layout: 1. machine changeovers are simplified 2. training periods for workers are shortened 3. materials-handling costs are reduced 4. parts can be made faster and shipped more quickly 5. less in-process inventory is required 6. production is easier to automate

Trends in modern manufacturing layouts: 1. cellular manufacturing layouts within larger process layouts 2. automated materials-handling equipment 3. U-shaped production lines 4. more open work areas 5. smaller and more compact factory layouts 6. less space provided for storage of inventories

Modern U.S. approach to manufacturing layout: 1. designed for product quality and flexibility 2. ability to quickly modify production rates and to quickly change to different product models 3. tend to have relatively small floor plans, compact and tightly packed layouts 4. large percentage of floor space used for production 5. less floor space occupied by inventory or materials handling devices 6. U-shaped production lines

Traditional U.S. approach to manufacturing layout: 1. designed for high machine and worker utilization 2. tend to have very large floor plans and generally underutilized floor space 3. extensive areas reserved for inventory 70 CHAPTER 5

4. much space for long conveyors and other material-handling devices 5. large production machines requiring much floor space 6. L-shaped or linear production lines Two categories of software tools most helpful in analyzing facility layouts: 1. computer aided design (CAD) 2. computer simulation

Computer aided design software: 1. allows 3D views of facility designs in full color 2. some allow virtual walk-through to obtain a realistic sense of a new facility design 3. common CAD packages are: AutoSketch, AutoCAD Architectural Desktop, S8 Architectural and Building Design Software, and ArchiCad

Computer simulation software: 1. equipment layouts and product flows can easily be developed 2. then manufacturing operation can be simulated and the performance of the production system can be recorded 3. potential changes in machine locations, product routings, number of workers, and storage locations can be easily evaluated 4. common simulation packages are: SIMPROCESS, ProModel, and VisFactory 5. Visfactory uses 256 algorithms to find the optimal layout

Analyzing warehouse layouts: 1. usually designed for fast storage and retrieval of inventory items and efficient use of space 2. must be designed around the type of material handling equipment to be used (forklifts require wide aisles; shelves can be tall if automated storage/retrieval equipment is used) 3. quality inspection areas for materials would be located near the receiving docks to minimize the travel of materials 4. warehouse management software can help with inventory location decisions

Line balancing: 1. the analysis of production lines that nearly equally divides the work to be done among workstations so that the number of workstations required is minimized 2. the goal is to determine how many workstations to have and which tasks to assign to each workstation so that the minimum number of workers and the minimum amount of machines are used to provide the required capacity

Seven steps in the line balancing procedure: 1. determine which tasks must be performed to complete one unit of a particular product 2. determine the order or sequence in which tasks must be performed 3. draw a precedence diagram 4. estimate task times 5. calculate the cycle time 6. calculate the minimum number of workstations 7. use one of the heuristics to assign tasks to workstations so that the production line is balanced FACILITY CAPACITY, LOCATION, and LAYOUT 71

Appropriateness of the incremental utilization and the longest task-time heuristics: 1. incremental utilization -- when one or more task times is equal to or greater than the cycle time 2. longest-task-time -- when each and every task time is less than or equal to the cycle time, and when the primary focus of the analysis of production lines is minimizing the number of workstations and the amount of tools and equipment required

Four steps involved in using the longest-task time heuristic: 1. let I = 1, where i is the number of the workstation being formed 2. make a list of all tasks that are candidates for assignment to this workstation (must satisfy three conditions); if no candidates can be found, go to step 4 3. assign the task from the list with the longest task time to the workstation 4. close the assignment of tasks to workstation i; if there are no more tasks on the candidate list but still tasks to be assigned, let i = I + 1 and go to step 2; if there are no more tasks to assign, the procedure is complete

Some issues involved with line balancing: 1. workers must be in control and not under the control of machines 2. the relationship between cycle time and the number of workstations 3. varying cycle time can have important results 4. rebalancing a production line is a common occurrence

Two fundamental requirements of parts to be made in cells: 1. the demand for the parts must be high enough and stable enough that moderate batch sizes of the parts can be produced periodically 2. the parts being considered must be capable of being grouped into parts families; within a parts family, the parts must have similar physical characteristics and thus require similar production operations

Common features of service facility layouts: 1. provide for easy entrance to the properties from freeways and thoroughfares 2. large, amply lighted parking areas with wide walkways leading to buildings 3. well marked, high-capacity entryways and exits 4. powered doors and escalators 5. lobbies or other receiving/holding areas for customers 6. services counters, employee workstations, merchandise displays, and many aisle ways

Two extremes in service facility layouts: 1. front-room operations – where entire layout must be designed around customers (customer-as-participant or customer-as-product) 2. back-room operations – where the layout must be designed only for physical materials processing and production efficiency (quasi-manufacturing)

Some quantifiable objectives in service facility layout: 1. minimize the total travel distance among departments 2. minimize the total cost of material handling among departments 3. minimize the sum of pairs of closeness ratings 72 CHAPTER 5

Steps in the procedure for using closeness ratings: 1. set m = 1 and n = 6 2. identify pairs of departments with closeness ratings of m 3. develop a trial layout with the pairs of departments identified in Step 2 adjacent to one another 4. identify pairs of departments with closeness ratings of n 5. fit the pairs of departments in Step 4 into the trial layout from Step 3 6. examine the trial layout in Step 5; if any ratings of pairs of departments are violated, rearrange department to comply with the ratings 7. if m = 3 and n = 4 then quit; otherwise set m = m + l and n = n - 1 and go to Step 2

KEY TERMSs

Aggregate unit of capacity Fixed position layout Best operating level Hybrid layout Capacity cushion Input rate capacity Decision tree analysis Line balancing Diseconomies of scale Material-handling system Economies of scale Maximum practical capacity Economies of scope Percentage capacity utilization Expected value Process layout Facility layout Product layout Facility planning Subcontractor network

1. The determination of how much long-range production capacity is needed, when it is needed, where production facilities should be located, and the layout and characteristics of the facilities is ______.

2. A ______is an arrangement in which a manufacturer develops long- range contractual relationships with several suppliers of parts, components, and subassemblies.

3. The ability to produce many product models in one highly flexible production facility more cheaply than in separate production facilities is ______.

4. A measure that relates output measure to inputs available is ______.

5. ______is a graphic aid in making multiphase decisions that shows the sequence and interdependence of decisions.

6. A measure that allows rates of various outputs to be converted to a common unit of output measure is ______.

7. An increase in unit cost caused by additional volume of outputs past the point of best operating level for a facility is known as ______. FACILITY CAPACITY, LOCATION, and LAYOUT 73

8. ______is additional production capacity added to expected demand to cope with unexpected changes in demand, as well as to lower production costs and increase product/volume flexibility and product/service quality.

9. ______is the level at which the annual volume of outputs results in the least average unit cost.

10. The relative measure of value representing the value of a particular outcome and the probability that it will occur is ______.

11. ______is a measure that allows rates of various inputs to be converted to a common unit of input measure.

12. Reduction in unit cost as fixed costs are spread over increasingly more units can be attributed to ______.

13. ______is the output attained within the normal operating schedule of shifts per day and days per week while bringing in high-cost inefficient facilities.

14. A ______is a layout designed to accommodate only a few product designs.

15. A plan for the location of all machines and utilities and for the physical arrangement within facilities of all manufacturing processes and their support functions is known as a ______.

16. A ______is a layout that uses a combination of layout types, such as an assembly line combined with a process layout.

17. A transportation network that receives, stores, moves, and delivers materials within a production facility is a ______.

18. A layout for the production of a variety of nonstandard products in relatively small batches is a ______.

19. A layout that locates the product in a fixed position and transports workers, materials, machines, and subcontractors to and from the product is a ______.

20. ______is a phase of assembly line study that nearly equally divides the work to be done among the workers so that the total number of employees required on the assembly line is minimized.

TRUE/FALSEs 74 CHAPTER 5

___ 1. The phasing-in of new products to replace older and declining products is one way of expanding capacity.

___ 2. Decision tree analysis is not useful unless probabilities and expected values are known.

___ 3. Capital-intensive firms generally are located near their sources of supply.

___ 4. An aggregate unit of capacity must be established for firms producing a single product or a few homogeneous ones.

___ 5. All things being equal, facilities with higher best operating levels require greater investments.

___ 6. The incremental approach to expanding capacity is risky because the funds could be committed to other types of investments that would be generating revenues.

___ 7. Expected value as a decision criterion is more meaningful when a decision is recurring.

___ 8. Facility layout planning involves layouts of only areas where products/services are actually produced.

___ 9. The main objective of facility layouts is to allow high labor, machine, and space utilization and productivity.

___ 10. The design and layout of buildings must be integrated with the design of the materials-handling system.

___ 11. Product layouts typically use specialized machines, thereby accommodating only a minimum number of product and process designs.

___ 12. A fixed position layout minimizes movement of materials-handling machines.

___ 13. Modern facility layouts are designed for manufacturing flexibility and the ability to shift to different production models or different production rates quickly.

___ 14. In a quasi-manufacturing service operation, the facility layout is designed around the customer, with emphasis on providing convenient parking, easy access to buildings from the parking area, and convenient and comfortable waiting areas.

___ 15. If two parts require the same machines for production, this is a good indication that they have similar production operations and therefore are good candidates for cellular manufacturing. MULTIPLE CHOICEs

___ 1. Which of the following is a factor that affects location decisions at the national, regional, community, and site levels? FACILITY CAPACITY, LOCATION, and LAYOUT 75

a. climate b. labor availability c. environmental impact d. availability of and proximity to transportation systems

___ 2. Which of the following is NOT an approach used to analyze capacity-planning decisions? a. break-even analysis b. internal rate of return c. computer simulation d. present value analysis

___ 3. Long-range capacity and facility location decisions are crucial for all the following reasons EXCEPT: a. long-range strategies are embodied in a firm's facility plans b. capital investment in buildings and equipment is enormous c. the capacity of facilities becomes a constraint on many POM decisions d. a facility's capacity delineates the product lines that can be produced in each time period

___ 4. The measure that relates output measures to the inputs available is: a. output rate capacity b. aggregate unit of capacity c. percentage of capacity utilization d. maximum practical capacity

___ 5. Which of the following is NOT a capacity expansion technique? a. acquiring other companies' facilities or resources b. reactivating facilities on standby status c. expanding, updating, or modifying existing facilities d. developing and phasing in new products as other products decline

___ 6. Which of the following would NOT be considered as diseconomies of scale? a. decreasing use of overtime b. increasing congestion of materials and workers c. difficulty in scheduling d. reduced morale 76 CHAPTER 5

___ 7. Which of the following is a disadvantage to investing heavily in one large facility to achieve a higher best operating level? a. involves more investment and costs than several smaller projects b. risk of having to turn away business due to interruption of production for an extended period of time c. current construction and interest costs might be higher than at some point in the future d. funds will be tied up in excess capacity on which no return will be realized for several years

___ 8. Which of the following is NOT an activity involved in capacity planning decisions? a. estimating the capacities of the present facilities b. setting the operating efficiency of production operations c. predicting the long-range future capacity needs for all products and services d. identifying alternative sources of capacity to meet future capacity needs

___ 9. Which of the following is NOT a factor affecting long-term demand for products and services? a. changes in consumer preferences b. demographic shifts c. time value of money d. changes in government regulations

___ 10. Which of the following is of the LEAST importance in locating a heavy manufacturing operation? a. proximity to raw materials and supplies b. degree of unionization c. zoning restrictions and environmental impact d. proximity to concentrations of customers

___ 11. Which one of the following is NOT a step in analyzing retailing facility location decisions? a. cost projections for each location alternative b. market research c. revenue projections for each location alternative d. consumer behavior research

___ 12. Which of the following is NOT a factor affecting site selection decisions? a. utilities available b. zoning restrictions c. degree of unionization d. environmental impact

___ 13. The dominant factors affecting the location of warehouse facilities are: a. availability of utilities b. availability of labor and degree of unionization c. incoming and outgoing transportation costs d. proximity to suppliers ___ 14. Which of the following is NOT a decision in facility planning? FACILITY CAPACITY, LOCATION, and LAYOUT 77

a. when additional capacity is needed b. where production facilities should be located c. what layout should be used d. what processes should be utilized

___ 15. Declining costs resulting from fixed costs being spread over increasingly more units are a result of: a. economies of scope b. diseconomies of scale c. economies of scale d. maximum practical capacity

___ 16. Which of the following is NOT an advantage that decision trees offer managers? a. a direct way of dealing with uncertain events b. a way of structuring complex multiphase decisions by mapping decisions from the present to the future c. a way of determining the absolute value of each decision alternative d. a way to clearly see in what sequence the decisions occur

___ 17. Which of the following approaches place quantitative and qualitative factors on the same scale, developing a weighted score for each location alternative? a. relative-aggregate-scores approach b. linear programming c. network analysis d. decision tree analysis

___ 18. What is an important objective that subcontractor networks allow firms to achieve? a. manufacturing flexibility b. workers trained at many jobs c. stable employment d. high worker utilization

___ 19. Which of the following is NOT a type of facility layout? a. cellular manufacturing b. product c. process d. group technology

___ 20. Which of the following is NOT a characteristic of process layouts? a. workers must be highly skilled b. products are in the production system for relatively long periods of time c. can accommodate only one or two product designs d. machines are arranged according to the type of process being performed 78 CHAPTER 5

___ 21. A layout designed to accommodate a variety of nonstandard products in relatively small batches is a: a. hybrid layout b. process layout c. cellular manufacturing layout d. product layout

___ 22. A layout that typically uses specialized machines is a: a. hybrid layout b. process layout c. cellular manufacturing layout d. product layout

___ 23. If a product were very large or bulky, which type of layout would be most suitable? a. process layout b. fixed position layout c. cellular manufacturing layout d. product layout

___ 24. Which of the following does NOT characterize modern production facility layouts? a. inventory as a safeguard against machine breakdowns b. small machines that can be easily changed over to different product models c. workers trained at many jobs d. heavy investment in preventive maintenance

___ 25. A feature of modern layouts that is now being seen in many U.S. facilities is: a. fully utilized, large production machines b. long production runs c. U-shaped production lines d. workers trained at a limited number of tasks

___ 26. Which of the following is NOT considered an objective of a manufacturing layout? a. employee safety and health b. privacy in work areas c. volume and product flexibility d. reduced material-handling costs

___ 27. Which of the following is NOT a principle of materials handling? a. materials should flow through the facility in direct flow patterns b. heavy or bulky materials should be moved the shortest distance possible c. mobile equipment should carry full loads at all times d. human efforts should be maximized

___ 28. Which of the following is NOT an advantage of cellular manufacturing layouts? a. high worker skills are not required b. less in-process inventory is required c. materials-handling costs are reduced d. production is easier to automate FACILITY CAPACITY, LOCATION, and LAYOUT 79

___ 29. If several parts cannot be cleanly divided between cells and an exceptional part must be selected, which of the following criteria would serve as a basis for this selection? a. the part uses the largest number of machines found together in a grouping b. the part can be entirely produced using only automated efforts c. all parts within its family are being produced in a cell d. the part has the lowest cost of subcontracting (or of producing in the job shop)

___ 30. Which of the following service organizations would most likely have a layout similar to a process layout in manufacturing? a. fast food restaurant b. warehouse of a retail store c. hospital d. daycare center

KEY METHODSs

METHOD EXAMPLES EXERCISES

Capacity Planning Decision Tree Analysis 1 1

Payback Period Approach 2 2

Facility Location Breakeven Analysis 3 3

Relative-Aggregate-Scores Approach 4 4

Manufacturing Facility Layout Line Balancing: Incremental Utilization Heuristic 5 5

Line Balancing: Longest-Task-Time Heuristic 6 6

Manufacturing Cell Formation 7 7

Service Facility Layout Closeness Ratings Approach 8 8

EXAMPLESs 80 CHAPTER 5

EXAMPLE 1

Decision Tree Analysis: Capacity Planning

A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line of air fresheners. The alternatives are to build a new plant, expand the old plant, or do nothing. The marketing department estimates a 35 percent probability of a market upturn, a 40 percent probability of a stable market, and a 25 percent probability of a market downturn. Georgia Swain, the firm's capital appropriations analyst, estimates the following annual returns for these alternatives:

Market Stable Market Upturn Market Downturn Build new plant $690,000 $(130,000) $(150,000) Expand old plant 490,000 (45,000) (65,000) Do nothing 50,000 0 (20,000)

a. Use a decision tree analysis to analyze these decision alternatives.

b. What should the company do?

c. What returns will accrue to the company if your recommendation is followed?

SOLUTION 1

a. Decision tree: Market Upturn $690,000

$152,000 .40 Stable Market (130,000)

Market Downturn (150,000)

Market Upturn $490,000 $152,000 .40 Stable Market || (45,000) $137,250 Market Downturn (65,000)

Market Upturn $50,000

.40 Stable Market 0 $12,500 Market Downturn b. Decision: Build the new plant (20,000) c. Returns to accrue: $690,000; ($130,000); or ($150,000) FACILITY CAPACITY, LOCATION, and LAYOUT 81

EXAMPLE 2

Payback Period: Capacity Planning Decision

A local used-furniture firm, Hardly Used, wishes to locate its retail store near the state university due to the high student demand for its goods. A real estate broker has a suitable building near the university and has agreed to either sell the building outright or provide a 50-year lease agreement. Here is the information affecting the analysis:

Lease Buy Salvage value -- 0 Initial cost -- $100,000 Economic life 50 years 50 years Annual depreciation -- $2,000 Annual lease payment $20,000 -- Tax rate 40% 40%

If the after-tax payback period is less than six years, Hardly Used will buy the building; if it is greater than six years, it will lease the building. What should Hardly Used do?

SOLUTION 2

First, determine the after-tax savings from buying the building rather than leasing:

Before Tax After Tax Amount Amount Annual depreciation tax savings $ 2,000 $ 800 Annual lease payment savings 20,000 12,000 Total $12,800 Next, compute the after-tax payback period for buying: Payback Period = (First Cost)/(Annual After-Tax Savings) = (l00,000)/(12,800) = 7.81 years This means that it would take almost 8 years to recover the $100,000 required to buy the building from after-tax savings. This payback is greater than the 6 years policy of the company; lease the new building.

EXAMPLE 3 82 CHAPTER 5

Breakeven Analysis: Location Decision

William Green, vice president of manufacturing for Computer Products Corporation (CPC), and his staff are studying three Midwestern alternative locations for a new production facility for producing bar code scanners. His staff analysts predict that the scanners will be a growing market over the next ten years, and the analysis group shares marketing's enthusiasm for planning facilities for producing this new product line. The analysts have developed these estimates for the three locations:

Annual Fixed Costs Variable Cost Location Alternative (Millions of Dollars) per Scanner Cleveland, Ohio $3.9 $3,400 South Bend, Indiana 3.6 3,700 Grand Rapids, Michigan 3.1 4,000

The marketing department at CPC estimates sales for the bar code scanners will be 1,000 scanners in the first year, 2,000 in the second year, and 4,000 in the third year.

a. In what range of production capacity would each of the locations be preferred?

b. Use break-even analysis to determine which location would be preferred in Years 1, 2, and 3. Which single location should be chosen and in what year will CPC break even?

SOLUTION 3

a. TCC = TCSB 3,900,000 + 3,400(X) = 3,600,000 + 3,700(X) 300,000 = 300(X) X = 1,000.00

TCC = TCGR 3,900,000 + 3,400(X) = 3,100,000 + 4,000(X) 800,000 = 600(X) X = 1,333.33

TCSB = TCGR 3,600,000 + 3,700(X) = 3,100,000 + 4,000(X) 500,000 = 300(X) X = 1,666.67 Cost at 0 Cost at 1,000 Cost at 1,333.33 Cost at 1,666,67 SCANNERS SCANNERS SCANNERS SCANNERS Location ($ MILLION) ($ MILLION) ($ MILLION) ($ MILLION) Cleveland 3.9 7.3 8.433 9.567 South Bend 3.6 7.3 8.533 9.767 Grand Rapids 3.1 7.1 8.433 9.767 FACILITY CAPACITY, LOCATION, and LAYOUT 83

Notice from this table that the Grand Rapids location is preferred until the annual level of production reaches 1,333.33 scanners-. Above this level, the Cleveland location is preferred. This means that South Bend would never be preferred at any level of production.

b. In the first year, when demand is expected to be 1,000 units, Grand Rapids is the preferred location. For year 2 and beyond, when demand is expected to be 2,000 units or more, Cleveland is most economical. Cleveland appears to be the best location choice. CPC will break even during the second year.

EXAMPLE 4

Relative-Aggregate-Scores Approach to Location Decision

The Arkansas Cement Company plans to locate a new cement production facility at either Little Rock, Fort Smith, or Jonesboro. Six location factors are important--cost per ton, labor availability, union activities, local transportation, proximity to similar industry, and proximity to raw materials. The weighting of these factors and the scores for each location are shown below:

Factor Location Score Relevant Location Factor Weight Fort Smith Little Rock Jonesboro Cost per ton .55 $55.40 $62.30 $59.10 Labor availability .15 .70 .90 .50 Union activities .15 .80 .40 .90 Local transportation .08 .70 .70 .60 Proximity to similar industry .05 .80 .80 .40 Proximity to raw materials .02 .70 .80 .50

Use the relative-aggregate-scores approach to compare the three alternative locations. Which location is preferred?

SOLUTION 4

Fort Smith Little Rock Jonesboro Relevant Factor Weight. Weight. Weight. Location Factor Weight Scores Scores Scores Scores Scores Scores Cost per ton .55 1.000* .550 .889* .489 .937* .515 Labor availability .15 .70 .105 .90 .135 .50 .075 Union activities .15 .80 .120 .40 .060 .90 .135 Local transportation .08 .70 .056 .70 .056 .60 .048 Prox. to similar industry .05 .80 .040 .80 .040 .40 .020 Prox. to raw materials .02 .70 .014 .80 .016 .50 .010 Total Location Scores .885 .796 .803 * These scores are determined by dividing the lowest cost by the actual costs: 84 CHAPTER 5

55.40/55.40 = 1.000, 55.40/62.30 = .889, and 55.40/59.10 = .937. All other scores are based on a maximum score of 1.00. Fort Smith is preferred; it has the highest total weighted score (.885)

EXAMPLE 5

Line Balancing: Incremental Utilization Heuristic

Lectro Inc. assembles alternators for automobiles. Ten basic tasks must be performed along the assembly line. The time to perform each task and the tasks that must immediately precede each task are:

Tasks that Time to Immediately Perform Task Task Precede (Minutes) A --- .10 B A .15 C A .20 D B,C .30 E --- .40 F E .40 G D,F .30 H G .50 I H .60 J I .50

If 400 alternators per hour must be produced by the assembly line, 50 minutes per hour are productive, and a maximum of three tasks can be combined into each workstation:

a. Draw a diagram of the precedence relationships.

b. Compute the cycle time per alternator in minutes.

c. Compute the minimum number of workstations required.

d. Combine the tasks into workstations to minimize idle time by using the incremental utilization heuristic.

e. Evaluate your proposed line.

f. Could you use the longest task-time heuristic? Why or why not? FACILITY CAPACITY, LOCATION, and LAYOUT 85

SOLUTION 5

a. Precedence diagram:

A D G H I J

b. Productive Time Per Hour Cycle Time = Demand Per Hour = 50/400 = .125 minutes per alternator c. Minimum Number (Sum of Task Times) (Demand Per Hour) = of Workstations Productive Time Per Hour

= (3.45)(400)/50 = 27.6 Workstations d. Using the incremental utilization heuristic:

(1) (2) (3) (4) (5) (6) Number of Actual Workstations Number of Utilization of Work Minutes Per Working Workstat. Workstations Ctr. Tasks Alternator [(3) ÷ Cycle time] Required [(4) ÷ (5)]× 100 1 A .10 .10/.125=0.8 1 80.0 1 A,B .10+.15=.25 .25/.125=2.0 2 100 2 C .20 .20/.125=1.6 2 80.0 2 C,D .20+.30=.50 .50/.125=4.0 4 100 3 E .40 .40/.125=3.2 4 80.0 3 E,F .40+.40=.80 .80/.125=6.4 7 91.0 3 E,F,G .80+.30=1.10 1.10/.125=8.8 9 97.8 3 E,F,G,H 1.10+.50=1.60 1.60/.125=12.8 13 98.5 3 E,F,G,H,I 1.60+.60=2.20 2.20/.125=17.6 18 97.8 4 I .60 .60/.125=4.8 5 96.0 4 I,J .60+.50=1.10 1.10/.125=8.8 9 98.0 Total Number of Workstations Required 28 86 CHAPTER 5

From the table above, we can summarize the assignment of tasks to work stations:

Tasks in work centers A,B C,D E,F,G,H I,J Work centers 1 2 3 4 Actual number of workstations 2.0 4.0 13.0 9.0 28.0 total

e. Minimum Number of Workstations Utilization = (100) Actual Number of Workstations = (27.6/28)100 = 98.6 % f. Cycle time is .125 minutes per alternator and several of the task times exceed the cycle time. The longest-task-time heuristic is therefore not appropriate for this problem.

EXAMPLE 6

Line Balancing: Longest-Task-Time Heuristic

The time to perform each task and the tasks that must immediately precede are:

Tasks That Time to Immediately Perform Task Task Precede (Minutes) A --- .15 B A .06 C B .05 D B .12 E B .09 F B .16 G C,D,E .08 H G,F .06 I H .05

If 300 products are needed per hour and 50 minutes per hour are productive:

a. Draw a diagram of the precedence relationships. b. Compute the cycle time per unit in minutes. c. Compute the minimum number of workstations required. d. Use the longest-task-time heuristic to balance the production line. e. Evaluate your solution. FACILITY CAPACITY, LOCATION, and LAYOUT 87

SOLUTION 6

a. Precedence diagram: C

A B G H I

b. Productive Time Per Hour Cycle Time = Demand Per Hour = 50/300 = .167 minutes per unit c. Minimum Number (Sum of Task Times) (Demand Per Hour) = of Workstations Productive Time Per Hour

= (.830)(300)/50 = 4.92 Workstations d. Using the longest-task-time heuristic:

(1) (2) (3) (4) (5) (6) Assigned Task Unassigned Sum of Task Time at Work- Candidate Assigned Task Task Workstation station List Task Time Times [.167 - (5)] 1 A A .15 .15 .017 2 B B .06 .06 .107 2 C,E E .09 .15 .017 3 C,D,F F .16 .16 .007 4 C,D D .12 .12 .047 5 C C .05 .05 .117 5 G G .08 .13 .037 6 H H .06 .06 .107 6 I I .05 .11 .057

From the table above, we can summarize the assignment of tasks to work stations: 88 CHAPTER 5

Tasks in Workstation Workstation 1 A 2 B, E 3 F 4 D 5 C,G 6 H, I

e. Minimum Number of Workstations Utilization = (100) Actual Number of Workstations = (4.92/6)100 = 82.0 %

EXAMPLE 7

Manufacturing Cell Formation

Maxx produces superchargers for high performance cars and trucks. Maxx has implemented a group technology program in its shop and now must formulate the manufacturing cells. Maxx has identified six parts that meet the requirements for CM. The parts-machines matrix below identifies the 6 parts and 5 machines on which the parts are presently produced. Organize the machines and parts into two similar-sized production cells that minimize the number of exceptional parts.

Parts 1 2 3 4 5 6 A X X X B X X X X Machines C X X D X X E X X X

SOLUTION 7

First, rearrange the rows: Place the machines that produce the same parts in adjacent rows.

Parts 1 2 3 4 5 6 FACILITY CAPACITY, LOCATION, and LAYOUT 89

A X X X E X X X Machines D X X C X X B X X X X

Next, rearrange the columns: Parts requiring the same machines are put in adjacent columns.

Parts 3 5 6* 1 2 4 A X X X E X X X Machines D X X C X X B X X X X * Part 6 is an exceptional part

Cell formulation summary: 2 manufacturing cells (MC1, MC2) will be used. Parts 3 and 5 will be produced in MC1 on machines A and E. Parts 1, 2 and 4 will be produced in MC2 on machines B, C and D. Part 6 is an exceptional part that cannot be produced within a single cell.

EXAMPLE 8

Service Facility Layout Using Closeness Ratings

AG Advertising is moving into a new office suite having seven large, roughly equal size rooms, one for each department of the firm. Shown below is a template of the office suite floor space to represent the layout of the seven departments.

Dept. A 5 Lisa, the manager, must now assign each departmentDept. B to a room. 2 She has developed a grid of closeness ratings for the 21 unique pairs of departments. 6 6 Dept. C 1 2 4 3 4 Dept. D 4 1 3 4 5 6 Dept. E 5 1 2 2 Dept. F 3 3 Dept. G 90 CHAPTER 5

Closeness Meaning Rating of Rating 1 Necessary 2 Very Important 3 Important 4 Slightly Important 5 Unimportant 6 Undesirable

SOLUTION 8

Layout satisfying all pairings of departments with ‘1’ closeness rating : CR = 1 B – D B D B – F B C – G F C G B Trying to satisfying all pairings of departments with ‘6’ closeness rating, we see that Dept. C needs to be moved.

CR = 6 A – D B D B – C B F G C B Layout satisfying all pairings of departments with ‘6’ closeness rating (note that Dept. D and Dept. F have been swapped):

EXERCISESs FACILITY CAPACITY, LOCATION, and LAYOUT 91

EXERCISE 1

Decision Tree Analysis: Capacity-Planning Decision

The Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility plans. The first alternative is to build a large new facility immediately. The second alternative is to build a small plant initially and to consider expanding it to a larger facility three years later if the market has proven favorable. Marketing has provided the following probability estimates for a ten-year plan:

First 3-Year Demand Next 7-Year Demand Probability Unfavorable Unfavorable .2 Unfavorable Favorable .0 Favorable Favorable .7 Favorable Unfavorable .1

If the small plant is expanded, the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for unfavorable. The accounting department has provided the payoff for each outcome:

Demand Facility Plan Payoff Favorable, favorable 1 $5,000,000 Favorable, unfavorable 1 2,500,000 Unfavorable, unfavorable 1 1,000,000 Favorable, favorable 2--expanded 4,000,000 Favorable, unfavorable 2--expanded 100,000 Favorable, favorable 2--not expanded 1,500,000 Favorable, unfavorable 2--not expanded 500,000 Unfavorable, unfavorable 2--not expanded 300,000

With these estimates, analyze Sunshine's facility decision and:

a. Perform a complete decision tree analysis.

b. Recommend a strategy to Sunshine.

c. Determine what payoffs will result from your recommendation.

EXERCISE 2 92 CHAPTER 5

Payback Period: Capacity Planning Decision

A medical clinic wishes to locate its offices near the local hospital. A real estate broker has a professional building to its liking near the hospital and has agreed to either sell the building outright or provide a 50-year lease agreement. The relevant data is:

Lease Buy Salvage value -- 0 Initial cost -- $450,000 Economic life 30 years 30 years Annual depreciation -- $15,000 Annual lease payment $45,000 -- Tax rate 40% 40%

If the after-tax payback period is less than six years, the clinic will buy the property. If the payback period is longer, it will lease the building. What should the clinic do?

EXERCISE 3

Breakeven Analysis: Location Decision

Three proposed Texas locations for a manufacturing plant have these estimated costs:

Annual Fixed Costs Variable Cost Location (Millions of Dollars) per Unit Dallas $2.5 $10 Houston 3.5 8 San Antonio 2.0 12

Determine in what range of annual outputs each of these locations would be preferred.

EXERCISE 4

Relative-Aggregate-Scores Approach to Location Decision

Lowtec, Inc. is looking at new sites for its expansion into its southern markets. Two possibilities are in need of additional analysis before the site selection team makes its final visits. Using the relative-aggregate-scores approach on the following data, make a recommendation to the visitation team.

Factor Location FACILITY CAPACITY, LOCATION, and LAYOUT 93

Relevant Location Factor Weight New Orleans Dallas Cost to manufacture .50 $376.00 $419.00 Labor skill .15 .60 .70 Labor availability .05 .40 .50 Transportation .20 .60 .55 Cost of living .10 .55 .45

EXERCISE 5

Line Balancing: Incremental Utilization Heuristic

The following table provides task and process order information for an assembly line.

Tasks that Time to Tasks that Time to Immediately Perform Task Immediately Perform Task Task Precede (Minutes) Task Precede (Minutes) A --- .38 F C .50 B A .31 G D,E .52 C A .45 H F .36 D B .42 I G,H .34 E B .28

If the demand for the product is 120 per hour and the productive time per hour is 50 minutes, complete the following:

a. Draw a precedence diagram for the data given. b. What is the cycle time? c. What is the minimum number of workstations? d. Combine the tasks into workstations using the incremental utilization heuristic. e. What is the efficiency of your line?

EXERCISE 6

Line Balancing: Longest-Task-Time Heuristic

The time to perform each task and the tasks that must immediately precede are:

Tasks that Time to Tasks that Time to 94 CHAPTER 5

Immediately Perform Task Immediately Perform Task Task Precede (Minutes) Task Precede (Minutes) A --- .20 G E,F .08 B --- .05 H --- .12 C --- .15 I --- . 05 D --- .06 J H,I,G .12 E A,B .03 K J .15 F C,D .16 L K .08

If 200 products are needed per hour and 50 minutes per hour are productive:

a. Draw a diagram of the precedence relationships. b. Compute the cycle time per unit in minutes. c. Compute the minimum number of workstations required. d. Use the longest-task-time heuristic to balance the production line. e. Evaluate your solution.

EXERCISE 7

Manufacturing Cell Formation

A manufacturer is interested in creating a cellular manufacturing layout with its current machines. The chart below shows the machines required by each part. Organize the machines and parts into three production cells that minimize the number of exceptional parts. Parts 1 2 3 4 5 6 7 8 A X X B X X C X X X X Machines D X E X X F X X G X X X H X

EXERCISE 8 FACILITY CAPACITY, LOCATION, and LAYOUT 95

Service Facility Layout Using Closeness Ratings

The OpenDoor Health Clinic is relocating to a new one-story office building with 20,000 square feet of floor space. The clinic’s director is in the process of deciding the approximate location of each of the clinic’s eight functional entities. Shown below is a template of the rectangular office building with, for simplicity, the floor space divided into eight equal-size areas.

The staff has agreed on closeness ratings for locating functional entities close to one another. Closeness Meaning Waiting Room (A) Rating of Rating 2 1 Necessary Admissions (B) 2 2 Very Important 2 6 Pharmacy (C) 4 3 3 Important 4 3 4 4 Slightly Important Doctors’ Offices (D) 3 4 6 5 Unimportant 1 4 6 3 Exam. Rooms (E) 5 4 2 6 Undesirable 3 3 3 Laboratory (F) 3 4 1 2 Surgery (G) 2 1 Emerg. Room (H) Assist the clinic director in developing a layout of the eight functional areas that attempts to minimize the sum of the closeness ratings of adjacent areas.

ANSWERSs

KEY TERMS 1. Facility planning 11. Input rate capacity 2. Subcontractor network 12. Economies of scale 3. Economies of scope 13. Maximum practical capacity 4. Percentage of capacity utilization 14. Product layout 5. Decision tree analysis 15. Facility layout 6. Aggregate unit of capacity 16. Hybrid layout 7. Diseconomies of scale 17. Materials-handling system 8. Capacity cushion 18. Process layout 9. Best operating level 19. Fixed-position layout 10. Expected value 20. Line balancing TRUE/FALSE 1. False 6. False 11. True 2. False 7. True 12. False 96 CHAPTER 5

3. True 8. False 13. True 4. False 9. False 14. False 5. True 10. True 15. True

MULTIPLE CHOICE 1. D 11. A 21. B 2. B 12. C 22. D 3. D 13. C 23. B 4. C 14. D 24. A 5. D 15. C 25. C 6. A 16. C 26. B 7. D 17. A 27. D 8. B 18. C 28. A 9. C 19. D 29. D 10. D 20. C 30. C

EXERCISES

1. a. Decision tree: Favorable, Favorable $5,000,000 $3,950,000 .1 Favorable, Unfavorable 2,500,000 Unfavorable, Unfavorable 1,000,000

Favorable $4,000,000 $3,512,500

$3,950,000 Unfavorable 100,000 $3,512,500 Favorable $1,500,000

$1,375,000 Unfavorable 500,000

.2 Unfavorable, Unfavorable $300,000 $2,870,000

b. Recommended strategy: Build the large plant c. Possible payoffs that will result: $5,000,000; $2,500,000; or $1,000,000 2. Payback period = $450,000/33,000 = 13.6 years. Clinic should lease the building. 3. Cost at Cost at Cost at Cost at FACILITY CAPACITY, LOCATION, and LAYOUT 97

0 Units 250,000 Units 500,000 Units 1,000,000 Units Location ($ MILLION) ($ MILLION) ($ MILLION) ($ MILLION) Dallas 2.5 5.0 7.5 12.5 Houston 3.5 5.5 7.5 11.5 San Antonio 2.0 5.0 8.0 14.0

Location Range of Output Dallas 0 – 250,000 Houston 250,000 – 500,000 San Antonio 500,000 + 4. First, consider the cost of production: New Orleans: $376/$376 = 1.00 Dallas: $376/$419 = .897 Now, find weighted aggregate score for each location: New Orleans: .5(1.00) + .15(.60) + .05(40) + .20(60) + .10(.55) = .785 Dallas: .5(.897) + .l5(.70) + .05(.50) + .20(.55) + .10(45) = .7335 This analysis indicates that New Orleans is preferred over Dallas.

5. a. Precedence diagram: D

b. Cycle time = .42 minutes c. Minimum number of workstations = 8.54 d. Tasks in work centers A B,C,D E,F G,H,I Work centers 1 2 3 4 Actual number of workstations 1.0 3.0 2.0 3.0 9.0 total

e. Efficiency (utilization) of proposed line = 94.9%

6. a. PrecedenceA diagram: H E

B G J K L C

F I D 98 CHAPTER 5

b. Cycle time = 50/200 = .25 minutes per unit c. Minimum number of workstations = (1.25)(200)/50 = 5.02 d. Workstation 1 2 3 4 5 6 Tasks in workstation A,B C,D,E F,G H,I J K,L

e. Efficiency (utilization) of proposed line = (5.02/6)100 = 83.7%

7. Parts 3 4 1 8 6 7 2 5 B X X G X X X D X Machines E X X H X A X X C X X X F X X

3 manufacturing cells (MC1, MC2, and MC3) will be used. Parts 3 and 4 will be produced in MC1 on machines B, D, and G. Parts 6 and 8 will be produced in MC2 on machines A, E and H. Parts 2, 5, and 7 will be produced in MC3 on machines C and F. Part 1 is an exceptional part that cannot be produced within a single cell.

8. D E C A

H G F B