Page 595 - Introduction to Business

CHAPTER 16 Managing Business Operations 569

EXHIBIT 16.5 match demand strategy A strategy
where capacity is increased as demand
Profit for the Different Capacity-Demand Combinations increases (p.568)
lag demand strategy A strategy where
Design Decision High Demand Medium Demand Low Demand capacity is increased after demand
increases (p.568)
High capacity $250,000 $ 50,000 ($35,000)
Medium capacity $100,000 $100,000 ($10,000)
Low capacity $ 80,000 $ 80,000 $80,000

level. A decision tree compares the three alternative capacity designs by calculating
their expected values. For example, the expected value of the high-capacity design
is calculated as
$250,000(.3) $50,000(.5) ($35,000)(.2) $93,000

The expected values of the medium- and low-capacity designs are calculated
similarly.

Medium-capacity design: $100,000(.3) $100,000(.5) ($10,000)(.2)
$78,000 EXHIBIT 16.6
Low-capacity design: $80,000(.3) $80,000(.5) $80,000(.2) Example of a Decision Tree
$80,000 for a Capacity Decision

Because the high-capacity design has the High demand
greatest expected value, the decision tree analy- 0.3 $250,000
0.5 Medium demand
sis recommends that the company should select $50,000
the high-capacity design. 0.2 Low demand –$35,000
High capacity

Location 0.3 High demand $100,000
Another important design decision that opera- Medium capacity 0.5 Medium demand $100,000
tions managers have to make is the geographic Low demand
0.2
location of the production system. According to Low capacity –$10,000
a survey, when making location decisions for High demand
manufacturing systems, operations managers 0.3 $80,000
generally look at five dominant factors. 0.5 Medium demand $80,000

Favorable labor climate 0.2 Low demand $80,000
Proximity to markets
Quality of life
Proximity to suppliers and resources
Proximity to the parent company’s other facilities 7

A favorable labor climate was selected by 76 percent of the respondents as a
dominant factor in location decisions, and this is especially true of labor-intensive
industries such as furniture, textiles, and consumer electronics. The labor climate
is a function of wages, worker availability, worker productivity, attitudes toward
work, and union strength.
Proximity to markets was voted by 55 percent of the respondents as a dominant
factor in facility location. This factor is more important for heavy or bulky products
where transportation costs are particularly high. For example, manufacturers of
food, paper, plastics, and metals are usually located close to their markets.
Quality of life includes quality schools, good recreational facilities, cultu-
ral events, and attractive natural surroundings. Approximately 35 percent of

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