What Every Entrepreneur Should Know When Making Business Facility Decisions


By: Site Engineer, Staff

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One of the major decisions that entrepreneurs must make is choosing a facility from which they can run their businesses perfectly.

Machinery acquisition and maintenance are part of an important aspect every entrepreneur needs to pay attention to.

Many good entrepreneurial ideas die prematurely because of the initial mistakes normally made by the entrepreneurs due to lack of knowledge, experience, and refusal to consult consultants for proper and professional ideas and help.

The entrepreneur should know that machinery acquisition is a capital investment which he should exercise utmost care because life span is 5 years. The improvement in the productivity demands that the entrepreneur must be abreast with technological changes.

Designing and Utilizing of Machinery Facilities

The facilities issues confronting managers focus mainly on expansion and contraction decisions, facilities location, and facilities layout.

These facilities we are talking about are the land, building, equipment, and other major physical inputs that substantially determine productive capacity, require time to alter and involve significant capital investments.

Expansion and Contraction Decisions

To decide on expanding and concentrating available facilities is related to long-range capacity planning.

There are four steps in the facilities decision process:

1. Decision Steps

It normally takes one or more years to build facilities and put them into operation. This reason makes it imperative for managers or entrepreneurs to always use forecasts to determine the probable future demand for products or services.

Entrepreneurs should compare current capacity with projected future demand. The current capacity is the maximum output rate possible from operations. By comparing it with future demand, entrepreneurs can determine whether current capacity is insufficient, about rights, or excessive.

When there is either insufficient or excess capacity entrepreneurs need to generate and then evaluate alternatives. Alternative typically involves location considerations an issue we discuss below.

Entrepreneurs carefully consider the risks and decide on a plan that includes the timing of capacity expansion or contraction, if any facilities decisions usually involve considerable risk because additional facilities raised fixed costs that must be paid even if the expected demand does not materialize. On the other hand, insufficient capacity may provide competition with opportunities to attract customers that would otherwise have been yours.

2. Choices for Expanding Capacity

In expanding capacity top managers generally have three options when demand is expected to grow somewhat steadily:

  • The Policy of Capacity in Approximate Equilibrium with Demand, an organization attempts to match capacity as closely as possible to anticipated demand. Since demand usually does not grow at a strictly even pace, this policy will sometimes lead to overcapacity and other times to under capacity.
  • Capacity-Leads-Demand Policy, an organization tries not to run short. Following this policy producer has a capacity cushion, which minimizes the likelihood of not being able to fill orders from customers. Although the capacity cushion will increase fixed costs, it can enable an organization to take care of demand surges, provide better service to customers, or be in a good position to attract customers from competitors that do not have a cushion.
  • Capacity-Lags-Demand Policy, an organization tries to maximize capacity utilization. In a series, this policy implies a negative cushion, since there is a high likelihood of running short. This approach requires less capital investment than that needed for a positive cushion and, therefore, provides a higher return on manufacturing investment than does a lower utilization of capacity rate. The danger is that the organization will lose sales and seriously erode its market share.

3. Facilities Location

The location of plants, warehouses, and service facilities, is an important aspect of facilities decisions. In fact, for the most part, decisions about additional facilities are closely connected to location considerations.

Most facilities location problems fall into one of four categories: single facility, multiple factories and warehouses competitive retail outlets, and emergency services. Each of these categories entails somewhat different criteria for deciding on facility locations.

A single-facility location involves a facility that does not need to interact with any other facilities that the organizations might have. A single factory or warehouse or a single retail store would fit into this category. Location decisions for a single facility typically revolve around multiple criteria, such as labor costs, labor supply, community, services, taxes, and other relevant issues.

Location for multiple factories and warehouses usually involves a strong consideration of the costs associated with distributing products to customers. Recently, efforts to adopt just-in-time inventory methods are causing manufacturing organizations to consider facility sites closer to major customers.

The location of emergency services is often connected to response time; for example, police and fire departments must be located where they can provide an acceptable level of services, which includes a speedy response in emergencies.

4. Facilities Layout

The entrepreneur should note that another aspect of facilities is the layout, the configuration of processing components (departments, workstations, and equipment) that make up the production sequence. There are three main types of layouts for facilities: process, product, and fixed position.

  • Process Layout: This is a product configuration in which the processing components are grouped according to the types of functions they perform. The production is made or the client receiving services move from function to function depending on the particular needs for that product or client; for example, a machine shop, a medical clinic, etc.
  • Product Layout: A product layout is a production configuration in which the processing components are arranged in a specialized line along which the product or client passes during the production process. With this arrangement, a product or service is produced through a somewhat standardized production sequence geared specifically to the particular characteristics of the product or service. For example, a separate, specialized assembly line for each of three products and services (a driver’s license processing center set to render one type of specialized service).
  • Fixed-Position Layout: This is a production configuration in which the product or client remains in one location and the tools, equipment, and expertise are brought to it, as necessary, to complete the production process. This arrangement is typically used when it is not feasible to move the product because of size, shape, any other characteristics when it makes more sense to take the service to the client. For example, the fixed-position layout is often used in building: ships, locomotives, and aircraft. This can also be used for services, such as furnace repair (in which the equipment, supplies and repairing expertise are brought to the home or building).


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