Operations Management: Long-Term Planning of Capacity and Location Installation
Operations Management - Unit 2: Long-Term Planning of Capacity and Location Installation
Long-term Planning of Capacity
Definition: Maximum amount of goods that a production unit can produce under normal operating conditions over a specified period.
Related to resources: Reflects the amount of resources available within that time frame.
Common Mistakes:
Confusing maximum capacity with sustainable capacity.
Failing to consider the time factor in capacity planning.
Determination of Production Capacity
Demand Forecast: Important for determining required capacity, which may differ from actual demand.
Establishing Alternatives:
Evaluate if the necessary capacity is greater than or less than the existing capacity.
Evaluation and Selection Process: Consider qualitative and quantitative aspects using tools such as decision trees.
Decision Trees
Symbols:
□ (Decision Node): Where one of several alternatives can be selected.
⚪ (State-of-nature Node): Identifies outcomes that may occur.
Example:
Favorable Market: Construct large plant costs $180,000 versus $120,000 for a small plant.
Unfavorable Market shows losses for both options, emphasizing risk assessment.
Location Quantitative Methods
Definition: The process of selecting a location for productive activity.
Importance:
Long-term financial commitment.
Competition and operational efficiency are influenced by the chosen location.
Reasons for a New Location
Insufficient production capacity.
Changes in materials used for production.
Anticipated competition changes.
Shifts in geographical demand.
Mergers and acquisitions.
Alternatives
Expand existing facilities.
Add new locations.
Close some facilities and open others.
Key Considerations for Location
Human Resources:
Availability, qualifications, labor costs, productivity, local legislation.
Local Surroundings:
Climate, culture, language, political stability, housing market.
Infrastructures: Ease of communication and transport.
Material Resources:
Raw material availability, supplier access, energy sources, land suitability.
Financial Resources:
Availability of banking services, fiscal benefits.
New Concepts of Localization
Industrial Parks: Areas designed for different industries to coexist with benefits.
Business Incubators: Spaces for young companies to develop collectively.
Weighting Factors
Selection Methodology:
Identify key factors and assign weights based on their relevance to each location.
Multiply scores by their respective weights to determine the best location.
Score Example:
Labor availability: 0.25 weight with scores for France and Denmark resulting in a total comparison score.
Cost-Volume Analysis
Process:
Graph costs against production volume to identify minimal cost locations.
Determine fixed and variable costs for each location and establish production levels.
Decision Criteria Under Risk and Uncertainty
Methods to Evaluate:
Wald Criteria, Optimistic and Pessimistic approaches, and the Laplace Criterion to handle uncertainty.
Assign probabilities to various states of nature when known.
Center of Gravity Method
Purpose: Determines ideal locations based on transport costs and volumes to minimize expenses.
Steps:
Identify potential locations and plot on a coordinate system.
Calculate the center based on the quantity and distances involved.
Transport Method
Overview: Solves distribution problems by minimizing shipping costs across multiple origins and destinations.
Uses linear programming to optimize transportation decisions.
Steps to Solve Transport Problems:
Formulate Cost Function: Minimize total transportation costs.
Identify initial feasible solutions using methods like the Northwest Corner or Minimum Cost Method.
Apply the Stepping-Stone algorithm to refine to the optimal solution.
This comprehensive overview of long-term planning in operations management covers essential concepts, methodologies, and analytical approaches crucial for effective capacity and location decision-making.