Location Strategy & Capacity Planning Flashcards
Break-Even Analysis
Technique for evaluating process and equipment alternatives
Objective is to find the point in money and units at which cost equals revenue
Requires estimation of fixed costs, variable costs, and revenue
Fixed costs are costs that continue even if no units are produced
Depreciation, taxes, debt, mortgage payments
Variable costs are costs that vary with the volume of units produced
Labor, materials, portion of utilities
Contribution is the difference between selling price and variable cost
Break-Even Assumptions
Costs and revenue are linear functions
Generally not the case in the real world
We actually know these costs
Very difficult to accomplish
There is no time value of money
Factor rating method
a wide variety of factors can be included in the analysis
Six steps in the method (factor rating)
Develop a list of relevant factors called critical success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor for each location
Recommend the location with the highest point score
locational: Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Three steps in the method (locational: Break-Even Analysis)
- Determine fixed and variable costs for each location
- Plot the cost for each location
- Select location with lowest total cost for expected production volume
Center of gravity model
Finds location of distribution center that minimizes distribution costs
Considers
Location of markets
Volume of goods shipped to those markets
Shipping cost (or distance)
Place existing locations on a coordinate grid
Grid origin and scale is arbitrary
Maintain relative distances
Calculate X and Y coordinates for ‘center of gravity’
Assumes cost is directly proportional to distance and volume shipped
Functions of Inventory
The decouple or separate various parts of the production process
the decouple the firm from fluctuations in demand and provide a strock of goods that will provide a selection for customers
To take advantage of quantity discounts
To hedge against inflation
Types of Inventory
raw material
work-in-process
Maintenance/repair/operating
finished goods
ABC Analysis
Divides inventory into three classes based on annual economic volume
Class A - high annual economic volume
Class B - medium annual dollar volume
Class C - low annual dollar volume
Used to establish policies that focus on the few critical parts and not the many trivial ones
ABC analysis → Other criteria than annual economic value may be used
Anticipated engineering changes
delivery problems
Quality problems
High unit cost
ABC analysis → Policies employed may include..
More emphasis on supplier development for A items
Tighter Physical inventory control for A items
More care in forecasting A items
Record Accuracy (ABC analysis)
Accurate records are critical ingredient in production and inventory systems
allows organization to focus on what is needed
Necessary to make precise decisions about ordering, scheduling, and shipping
Incoming and outgoing record keeping must be accurate
Stockrooms should be secure
Cycle Counting (ABC analysis)
Items are counted and records updated on a periodic basis
Often used with ABC analysis to determine cycle
Has several advantages (ABC analysis)
Eliminates shutdowns and interruptions
Eliminates annual inventory adjustment
Trained personnel audit inventory accuracy
Allows causes of errors to be identified and corrected
Maintains accurate inventory records
