Capacity Requirement Capacity Requirement PlanningPlanning

Operations Management 345Operations Management 345Joyce HillJoyce Hill

Capacity Requirements PlanningCapacity Requirements Planning• Capacity Requirements Planning is a Capacity Requirements Planning is a

computerized technique for projecting resource computerized technique for projecting resource requirements for critical work stations.requirements for critical work stations.– Inputs:Inputs:

• Planned order releasesPlanned order releases• Routing fileRouting file• Open orders fileOpen orders file

– Outputs:Outputs:• Load Profile for each work centerLoad Profile for each work center

DefinitionsDefinitions

• Planned Order Releases:Planned Order Releases: Information from the Information from the Material Requirements Planning which tells when you Material Requirements Planning which tells when you should start the order so it can be completed on time.should start the order so it can be completed on time.

• Routing Files:Routing Files: Information that details the Information that details the requirements of equipment and labor to complete the requirements of equipment and labor to complete the order as needed in the required time frame.order as needed in the required time frame.

• Open Orders Files: Open Orders Files: Information regarding the orders Information regarding the orders that are currently started and need to be completed.that are currently started and need to be completed.

Capacity Requirements PlanningCapacity Requirements Planning• A tool for:A tool for:

– determining capacity that is available and determining capacity that is available and required.required.

– Alleviating bottleneck work centers.Alleviating bottleneck work centers.• Helping planners make the right Helping planners make the right

decisions on scheduling before problems decisions on scheduling before problems develop.develop.

• Verifies that you have sufficient capacity Verifies that you have sufficient capacity available to meet the capacity available to meet the capacity requirements for MRP plans.requirements for MRP plans.

What is Capacity?What is Capacity?• The work that the system is capable of The work that the system is capable of

doing in a period of time.doing in a period of time.• It must be determined at different It must be determined at different

levels:levels:– plant plant – departmentdepartment– work center.work center.

• It is normally stated in standard hours of It is normally stated in standard hours of work.work.

What is Capacity?What is Capacity?• Capacity = (no. of machines or workers) x (no. Capacity = (no. of machines or workers) x (no.

shifts) x (utilization) x (efficiency)shifts) x (utilization) x (efficiency)

(Russell & Taylor)(Russell & Taylor)

• Best operating level is the percent of capacity Best operating level is the percent of capacity utilization that minimizes average unit cost. utilization that minimizes average unit cost. – Usually 80% with a 20% cushionUsually 80% with a 20% cushion

Utilization and EfficiencyUtilization and Efficiency• Utilization is the percent of available time Utilization is the percent of available time

spent working.spent working.

• Efficiency is how well a machine or worker Efficiency is how well a machine or worker performs compared to a standard output level.performs compared to a standard output level.

Russell and Russell and TaylorTaylor

Utilization and EfficiencyUtilization and Efficiency

Actual Hours ChargedActual Hours ChargedUtilization = Utilization =

Scheduled Available HoursScheduled Available Hours

Standard Hours EarnedStandard Hours EarnedEfficiency = Efficiency =

Actual Hours ChargedActual Hours Charged

Reason to use CPRReason to use CPR• Bottleneck Management -Bottleneck Management -

– The throughput of all products processed is The throughput of all products processed is controlled by bottlenecks.controlled by bottlenecks.

– Work centers need to be scheduled at a rate Work centers need to be scheduled at a rate to prevent bottlenecks.to prevent bottlenecks.

– To eliminate bottlenecks, a time buffer To eliminate bottlenecks, a time buffer inventory should be established.inventory should be established.

Basic Strategies for Timing Basic Strategies for Timing CapacityCapacity

• CRP provides information to determine the CRP provides information to determine the timing of capacity expansion. The basic timing of capacity expansion. The basic strategies in relation to a steady growth in strategies in relation to a steady growth in demand are:demand are:– Capacity Lead StrategyCapacity Lead Strategy– Capacity Lag StrategyCapacity Lag Strategy– Average Capacity StrategyAverage Capacity Strategy

Capacity Lead StrategyCapacity Lead Strategy• In anticipation of demand, capacity is In anticipation of demand, capacity is

increased.increased.• This is an aggressive strategy and is used to This is an aggressive strategy and is used to

lure customers away from competitors.lure customers away from competitors.

Capacity PlanningCapacity PlanningHow much to increase capacity demands How much to increase capacity demands depend upon a number of factors, including:depend upon a number of factors, including:• Anticipated demand – volume & certaintyAnticipated demand – volume & certainty• Strategic objectives Strategic objectives • Costs of expansion and operationCosts of expansion and operation

Capacity Lag StrategyCapacity Lag Strategy• Increase capacity after demand has increased.Increase capacity after demand has increased.• This is a conservative strategy and may result This is a conservative strategy and may result

in lose of customers.in lose of customers.• You assume customers will return after You assume customers will return after

capacity has been met.capacity has been met.

Average Capacity StrategyAverage Capacity Strategy• Average expected demand is calculated and Average expected demand is calculated and

capacity is increased accordingly.capacity is increased accordingly.• This is the most moderate strategy.This is the most moderate strategy.

Adjustments to CapacityAdjustments to CapacityIncrease capacity by:Increase capacity by:• Adding extra shiftsAdding extra shifts• Scheduling overtime or weekendsScheduling overtime or weekends• Adding equipment and/or personnelAdding equipment and/or personnelReduce load by:Reduce load by:• Reducing lot sizesReducing lot sizes• Holding work in production controlHolding work in production control• Subcontracting work to outside suppliers Subcontracting work to outside suppliers

Adjustments to CapacityAdjustments to CapacityReduce capacity by:Reduce capacity by:• Temporarily reassigning staffTemporarily reassigning staff• Reducing the length of shiftsReducing the length of shifts• Eliminating shifts Eliminating shifts Increase load by:Increase load by:• Releasing orders earlyReleasing orders early• Increasing lot sizesIncreasing lot sizes• Making items normally outsourcedMaking items normally outsourced

Capacity PlanningCapacity Planning• Best operating is seldom at 100% and varies Best operating is seldom at 100% and varies

with industry. with industry. – In industries where demand is highly In industries where demand is highly

variable, large capacity cushions are variable, large capacity cushions are common.common.

– Companies with less flexibility and higher Companies with less flexibility and higher costs maintain small cushions – under 10%.costs maintain small cushions – under 10%.

– Overbooking is common with some Overbooking is common with some industries such as airlines.industries such as airlines.

Economies of ScaleEconomies of Scale• Economies of scale is the best operating level.Economies of scale is the best operating level.• Economies of scale is the point where it costs Economies of scale is the point where it costs

less per unit to produce high levels of output.less per unit to produce high levels of output.– Occurs when fixed costs are spread over Occurs when fixed costs are spread over

large number of unitslarge number of units

Diseconomies of ScaleDiseconomies of Scale• Occurs at a certain level of output. Occurs at a certain level of output.

– When fixed costs increase with number of When fixed costs increase with number of units being produced, examples:units being produced, examples:• Higher reworkHigher rework• More equipment breakdownMore equipment breakdown

What is CRP Used For?What is CRP Used For?• To determine the capability of a system or To determine the capability of a system or

resource to produce a quantity of output in a resource to produce a quantity of output in a particular time period. For example:particular time period. For example:– Should the hospital hire more registered Should the hospital hire more registered

nurses to care for the projected patient nurses to care for the projected patient load?load?

– Should the hospital build more rooms for Should the hospital build more rooms for patients?patients?

– What is the projected finish time for the What is the projected finish time for the current projects?current projects?

CRP Produces Load ProfileCRP Produces Load Profile• CRP uses the information to produce a load CRP uses the information to produce a load

profile for each machine or work center. A load profile for each machine or work center. A load profile:profile:– Compares released orders and planned Compares released orders and planned

orders with the capacity of the work center.orders with the capacity of the work center.– Identifies underloads and overloads.Identifies underloads and overloads.

What is a load?What is a load?• Load refers to the standard hours Load refers to the standard hours

of work assigned to a facility.of work assigned to a facility.

Russell and TaylorRussell and Taylor

What Is Load Percent?What Is Load Percent?• Load percent is the ratio of load to Load percent is the ratio of load to

capacity.capacity.

LoadLoadLoad percent = Load percent = x 100% x 100%

CapacityCapacity

Russell and TaylorRussell and Taylor

Load % ExampleLoad % Example• A local road construction company needs to develop A local road construction company needs to develop

engineering specifications prior to doing any pre-surfacing engineering specifications prior to doing any pre-surfacing preparation. The company has been awarded the bid on four preparation. The company has been awarded the bid on four projects. They have one engineer. It takes 4 hours per mile to projects. They have one engineer. It takes 4 hours per mile to develop the engineering specifications. The first project is 30 develop the engineering specifications. The first project is 30 miles long and must be started by March 15miles long and must be started by March 15thth to complete on to complete on schedule. The second project is 20 miles long and must be schedule. The second project is 20 miles long and must be started by April 1started by April 1st.st. The third project is 5 miles long and must The third project is 5 miles long and must be started by May 1be started by May 1stst. The fourth project is 15 miles long and . The fourth project is 15 miles long and must be started by May 23must be started by May 23rdrd. It is now February 15. It is now February 15thth. The . The engineer works a 40 hours week and is very experienced so he engineer works a 40 hours week and is very experienced so he operates at 100% efficiency. Assume one project can not be operates at 100% efficiency. Assume one project can not be started until the previous project is completed. Does the started until the previous project is completed. Does the engineer have enough time to accomplish the specifications on engineer have enough time to accomplish the specifications on time?time?

Engineering Calculations Engineering Calculations (Capacity)(Capacity)Numbers of hours = 40 Numbers of hours = 40 Shifts = 1Shifts = 1Efficiency = 100%Efficiency = 100%Utilization = 4/5 = 80%Utilization = 4/5 = 80%Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours

Project 1 capacity = 4 (weeks) x 32 = 128Project 1 capacity = 4 (weeks) x 32 = 128Project 2 capacity = 2 (weeks) x 32 = 64Project 2 capacity = 2 (weeks) x 32 = 64Project 3 capacity = 4 (weeks) x 32 = 128Project 3 capacity = 4 (weeks) x 32 = 128Project 4 capacity = 3 (weeks) x 32 = 96Project 4 capacity = 3 (weeks) x 32 = 96

Engineering Calculations (Load)Engineering Calculations (Load)Project 1 = 30 x 4 hours per mile = 120 hoursProject 1 = 30 x 4 hours per mile = 120 hours

(start by February 15(start by February 15thth – must be completed by March 15 – must be completed by March 15thth))Project 2 = 20 x 4 hours per mile = 80 hoursProject 2 = 20 x 4 hours per mile = 80 hours

(start March 16(start March 16thth – must be completed by April 1 – must be completed by April 1stst))Project 3 = 5 x 4 hours per mile = 20 hoursProject 3 = 5 x 4 hours per mile = 20 hours

(start April 2(start April 2ndnd – must be completed by May 1 – must be completed by May 1stst))Project 4 = 15 x 4 hours per mile = 60 hoursProject 4 = 15 x 4 hours per mile = 60 hours

(start by May 2(start by May 2ndnd – must be completed by May 23 – must be completed by May 23rdrd))

Engineering Calculations (Load Engineering Calculations (Load %)%)

• Project 1 = 120/128 = 94%Project 1 = 120/128 = 94%– Can be completed Can be completed

• Project 2 = 80/64 = 125%Project 2 = 80/64 = 125%– Can not be completedCan not be completed

• Project 3 = 20/128 = 16%Project 3 = 20/128 = 16%– Can be completedCan be completed

• Project 4 = 60/96 = 63%Project 4 = 60/96 = 63%– Can be completedCan be completed

Road Construction BiddingRoad Construction Bidding• In analyzing the engineering calculations, the In analyzing the engineering calculations, the

company must decide if it cost effective to company must decide if it cost effective to accept the bid on project 2. Based on the accept the bid on project 2. Based on the current capacity, the engineer is not able to current capacity, the engineer is not able to complete the engineering specifications as complete the engineering specifications as needed. If the company accepts the bid, one needed. If the company accepts the bid, one of the following adjustments will need to be of the following adjustments will need to be made:made:– Add extra shift (weekend or evening)Add extra shift (weekend or evening)– Schedule overtimeSchedule overtime– Add personnel temporarilyAdd personnel temporarily

Test Exercise of Load %Test Exercise of Load %• A local hospital prides themselves in top quality patient A local hospital prides themselves in top quality patient

care. They have 5 registered nurses on each of the 3 care. They have 5 registered nurses on each of the 3 shifts and each nurse cares for 5 patients. Each patient shifts and each nurse cares for 5 patients. Each patient requires 1.5 hours of RNs time. For week one they have requires 1.5 hours of RNs time. For week one they have projected the patient load to be 200 patients, week two projected the patient load to be 200 patients, week two the patient load will be 225 patients, week three the the patient load will be 225 patients, week three the patient load will be 180 patients and week four the patient load will be 180 patients and week four the patient load will be 195 patients. The staff consists of patient load will be 195 patients. The staff consists of about 30% student graduate RNs; therefore the about 30% student graduate RNs; therefore the efficiency is 70%. Each nurse works 36 hours per week. efficiency is 70%. Each nurse works 36 hours per week. Does the hospital have sufficient staff to provide care for Does the hospital have sufficient staff to provide care for the patients? the patients?

SummarySummary• To operate at maximum capacity, companies To operate at maximum capacity, companies

must use the resources available. If resources must use the resources available. If resources under underutilized, the profit margin will not under underutilized, the profit margin will not be maximum. be maximum.

• Using capacity requirements planning helps a Using capacity requirements planning helps a company identify potential problems, such as company identify potential problems, such as eliminating the possibility of overworking the eliminating the possibility of overworking the current staff, overloading machines, losing current staff, overloading machines, losing customers because the work could not be customers because the work could not be completed as scheduled, paying penalties for completed as scheduled, paying penalties for late delivery.late delivery.

ResourcesResources• Russell, Roberta A. and Bernard W. Taylor III Russell, Roberta A. and Bernard W. Taylor III Operations Operations

Management. Management. 44thth ed. New Jersey: Prentice Hall 2003 ed. New Jersey: Prentice Hall 2003• ““Capacity Requirement Planning” MGT 651 –IV, Dr. OzatalayCapacity Requirement Planning” MGT 651 –IV, Dr. Ozatalay• www.mitrol.com/html/capacityplanning.htmlwww.mitrol.com/html/capacityplanning.html• www.coalitioncomputing.com/cccweb/products/software/gp/eewww.coalitioncomputing.com/cccweb/products/software/gp/ee

nterprise/modules/GP-CapacityRequirePlan.docnterprise/modules/GP-CapacityRequirePlan.doc• http://sandbox.aiss.uiuc.edu/oracle/nca/crp/crp.htmhttp://sandbox.aiss.uiuc.edu/oracle/nca/crp/crp.htm