Project Management
Peeyush Pandey
Assistant Professor
IIM Rohtak
Facility Planning
HOW MUCH long range capacity is needed
WHEN additional capacity is needed
WHERE the production facilities should be located
WHAT the layout and characteristics of the facilities should be
Why these decisions are crucial?
Huge investment:
Land, Building
Equipment
Technology
Services
Strategic plan
Product line
Market
Technology
Operational efficiency
Maintenance cost
Ease of scheduling
Economies of scale
Long-Range Capacity Planning
Steps in the Capacity Planning Process
Estimate the capacity of the present facilities.
Forecast the long-range future capacity needs.
Identify and analyze sources of capacity to meet these needs.
Select from among the alternative sources of capacity.
Definitions of Capacity
In general, production capacity is the maximum production
rate of an organization.
Capacity can be difficult to quantify due to
Day-to-day uncertainties such as employee absences, equipment
breakdowns, and material-delivery delays
Products and services differ in production rates (so product mix is a
factor)
Different interpretations of maximum capacity
Definitions of Capacity
Sustainable practical capacity is defined as the greatest level of
output that a plant can maintain
within the framework of a realistic work schedule
taking account of normal downtime
assuming sufficient availability of inputs to operate the machinery
and equipment in place
Measurements of Capacity
Output Rate Capacity
For a facility having a single product or a few homogeneous products,
the unit of measure is straight forward
For a facility having a diverse mix of products, an aggregate unit of
capacity must be established using a common unit of output
Measurements of Capacity
Input Rate Capacity
Commonly used for service operations where output measures are
particularly difficult
Hospitals use available beds per month
Airlines use available seat-miles per month
Movie theatres use available seats per month
Measurements of Capacity
Capacity Utilization Percentage
Relates actual output to output capacity
Example: Actual automobiles produced in a quarter divided by the
quarterly automobile production capacity
Relates actual input used to input capacity
Example: Actual accountant hours used in a month divided by the
monthly account-hours available
Forecasting Capacity Demand
Consider the life of the input (e.g. facility is 10-30 yr)
Understand product life cycle as it impacts capacity
Anticipate technological developments
Anticipate competitors actions
Forecast the firms demand
Expansion of Long-Term Capacity
Subcontract with other companies
Acquire other companies, facilities, or resources
Develop sites, construct buildings, buy equipment
Expand, update, or modify existing facilities
Reactivate standby facilities
Reduction of Long-Term Capacity
Sell off existing resources, lay off employees
Transfer employees
Develop and phase in new products/services
Economies of Scale
Best operating level - least average unit cost
Economies of scale - average cost per unit decreases as the
volume increases toward the best operating level
Diseconomies of scale - average cost per unit increases as the
volume increases beyond the best operating level
Economies and Diseconomies of Scale
Average Unit
Cost of Output ($)
Economies Diseconomies
of Scale of Scale
Best Operating Level
Annual Volume (units)
Analyzing Capacity-Planning Decisions
Break-Even Analysis
Present-Value Analysis
Computer Simulation
Linear Programming
Decision Tree Analysis
Example: King Publishing
Break-Even Analysis
\
King Publishing intends to publish a book in residential
landscaping. Fixed costs are $125,000 per year, variable costs
per unit are $32, and selling price per unit is $42.
A) How many units must be sold per year to break even?
B) How much annual revenue is required to break even?
C) If annual sales are 20,000 units, what are the annual profits?
D) What variable cost per unit would result in $100,000 annual
profits if annual sales are 20,000 units?
Example: King Publishing
A) How many units must be sold per year to break even?
Q = FC/(p-v) = $125,000/(42 32) = 12,500 books
B) How much annual revenue is required to break even?
TR = pQ = 42(12,500) = $525,000
C) If annual sales are 20,000 units, what are the annual profits?
P = pQ (FC + vQ)
= 42(20,000) [125,000 + 32(20,000)]
= 840,000 125,000 640,000
= $75,000
Example: King Publishing
D) What variable cost per unit would result in $100,000 annual
profits if annual sales are 20,000 units?
P = pQ (FC + vQ)
100,000 = 42(20,000) [125,000 + v(20,000)]
100,000 = 840,000 125,000 20,000v
20,000v = 615,000
v = $30.75
Example: Central Perk Caf
Decision Tree Analysis
Central Perk Caf is about to build a new restaurant. An
architect has developed three building designs, each with a
different seating capacity. Central Perk estimates that the
average number of customers per hour will be 80, 100, or 120
with respective probabilities of 0.4, 0.2, and 0.4.
Example: Central Perk Caf
Payoff Table
Average Number of Customers Per Hour
c1 = 80 c2 = 100 c3 = 120
Design A $10,000 $15,000 $14,000
Design B $ 8,000 $18,000 $12,000
Design C $ 6,000 $16,000 $21,000
Example: Central Perk Caf
Payoffs
c1 (.4) 10,000
c2 (.2)
2 15,000
c3 (.4)
d1 14,000
c1 (.4)
d2 8,000
1 c2 (.2)
3 18,000
d3 c3 (.4)
12,000
c1 (.4)
6,000
c2 (.2)
4
c3 16,000
(.4)
21,000
Example: Central Perk Caf
Expected Value For Each Decision
EV = .4(10,000) + .2(15,000) + .4(14,000)
d1 = $12,600
2
Design A
EV = .4(8,000) + .2(18,000) + .4(12,000)
Design B d2 = $11,600
1 3
d3
Design C
EV = .4(6,000) + .2(16,000) + .4(21,000)
= $14,000
4
Facility Location
Facility location Design Decisions
Framework for Network Design Decisions
Phase I: Define a Supply Chain Strategy/Design
Competitive Strategy
Supply Chain Strategy
Forecast the global/Local competition
Identify constraints on available capital
Determine how to compete
Acquiring
Partnering
Extending
Phase II: Define the Regional Facility Configuration
Forecast of the demand by country or region
Find homogeneity in product variety
Consider flexible or consolidated facility
Economies of scale or scope
Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for
local production, tax incentives, and export or import restrictions
Identify competitors/Locate close or far to competitors
Framework for Network Design Decisions
Phase III: Select a Set of Desirable Potential Sites
Analyze the infrastructure
Hard infrastructure requirements
Soft infrastructure requirements
Phase IV: Location Choices
Select precise location
Capacity allocation
