1. Capacity Requirement Planning
This presentation is to fulfill the requirement of the freequality presentation for Operations Management 345.
Operations Management 345
Joyce Hill

2. Capacity Requirements Planning
Capacity Requirements Planning is a computerized technique for projecting resource requirements for critical work stations.
Inputs:
Planned order releases
Routing file
Open orders file
Outputs:
Load Profile for each work center
Capacity Requirements Planning is a computerized system for projecting resource requirement for critical work stations. Several components are input into the system to effectively address the capacity and planning needs, including (but not limited to):
Planned order releases
- on forecasted orders
- on customer orders
Routing file
- Equipment
- Labor
Open orders file
The CRP processes this information and produces a load profile for each work center

3. Definitions
Planned Order Releases: Information from the Material Requirements Planning which tells when you should start the order so it can be completed on time.
Routing Files: Information that details the requirements of equipment and labor to complete the order as needed in the required time frame.
Open Orders Files: Information regarding the orders that are currently started and need to be completed.
To fully understand the definition of the information that goes into the capacity requirement planning, it is important to understand the terms used.
The planned order releases is from the material requirements planning which translates a master schedule for end items into time-phased requirements for subassemblies, components and raw materials. It is used to be certain materials are available when needed. (Russell and Taylor)
Routing files has a triple component – it determines which workers and/or machines are needed for an order, which operations should be completed first, and the length of time each operation will take.
Open order files contain the data on the jobs currently being worked on but are not yet completed.

4. Capacity Requirements Planning
A tool for:
determining capacity that is available and required.
Alleviating bottleneck work centers.
Helping planners make the right decisions on scheduling before problems develop.
Verifies that you have sufficient capacity available to meet the capacity requirements for MRP plans.
Capacity requirements planning is a computerized tool that is used to determine the available and required capacity to help alleviate bottlenecks and to help identify potential problems before they occur.
It is a tool that measures capacity to determine you have sufficient capacity to meet the requirements for the Material Requirements Planning. MRP is the computerized inventory system used for generating purchase orders and work orders of materials, components and assemblies. (Russell & Taylor)

5. What is Capacity?
The work that the system is capable of doing in a period of time.
It must be determined at different levels:
plant
department
work center.
It is normally stated in standard hours of work.
Capacity is the maximum output or volume a system can produce, the maximum work that a system is capable of doing in a given period of time. This information is needed to determine projects companies can commit themselves to, bid on or accept. By calculating the capacity, the company can determine if they are capable of completing the project within the timeframe required.

6. What is Capacity?
Capacity = (no. of machines or workers) x (no. shifts) x (utilization) x (efficiency)
(Russell & Taylor)
Best operating level is the percent of capacity utilization that minimizes average unit cost.
Usually 80% with a 20% cushion
Capacity utilization is seldom figured at 100%. Several factors are considered when calculating utilization, for example you would have to determine if it is feasible to run machinery 100% of the time. By doing so, you would not have any time for maintenance on the machines. Operating at 100% would certainly provide a higher profit margin for a period of time; therefore, short term profit would be very good. However, in planning projects you have to plan long term, for machinery to continue operating you would have to calculate some down time to do preventive maintenance. Other things to consider is the off time for workers, with lunches, meetings, breaks, they will not work 100% of the time at are on the job.

7. Utilization and Efficiency
Utilization is the percent of available time spent working.
Efficiency is how well a machine or worker performs compared to a standard output level.
Russell and Taylor
Utilization takes into account the down time a worker has during the work day. Down time would include time out for meetings, lunches or other breaks.
Efficiency can be calculated by using past history data or from work measurement techniques. It is effected by the product mix, the inventory on hand, how efficient the machinery is operating and how experienced the workers are as well as other factors.

8. Utilization and Efficiency
Actual Hours Charged
Utilization =
Scheduled Available Hours
Standard Hours Earned
Efficiency =
To calculate utilization you need to divide the actual hours worked by the scheduled available hours. Efficiency is calculated by divided the standard hours earned by the actual hours charged.

9. Reason to use CPR Bottleneck Management -
The throughput of all products processed is controlled by bottlenecks.
Work centers need to be scheduled at a rate to prevent bottlenecks.
To eliminate bottlenecks, a time buffer inventory should be established.
One reason to use CPR is to identify if bottlenecks could occur, and to change the schedule if bottlenecks are projected. Bottlenecks occur if one work center is not able to process the work load as quickly as the previous work centers. To prevent bottlenecks, the work centers need to consider the work that is to be produced at each work center and the time it takes to do the work, then schedule the inventory and time accordingly.

10. Basic Strategies for Timing Capacity
CRP provides information to determine the timing of capacity expansion. The basic strategies in relation to a steady growth in demand are:
Capacity Lead Strategy
Capacity Lag Strategy
Average Capacity Strategy
Basic strategies used for timing capacity to prevent bottlenecks and to ensure the work center is operating at maximum capacity are capacity lead strategy, capacity lag strategy and average capacity strategy.

11. Capacity Lead Strategy
In anticipation of demand, capacity is increased.
This is an aggressive strategy and is used to lure customers away from competitors.
With the capacity lead strategy, capacity is increasing anticipating the demand will be there. For example, a hospital may decide to hire more registered nurses that is need in anticipation of increased need in the future. This strategy is used to lure customers away from the competitors who may not be anticipating the demand or who cannot meet the demand. This strategy also gives the company a foothold in an expanding market. The hospital may decide to hire the registered nurses before a competing hospital hires them. The hospital would have hire costs with the increased staff but they may decide it is worth the higher costs to ensure the staff will be there when needed.

12. Capacity Planning How much to increase capacity demands
depend upon a number of factors, including:
Anticipated demand – volume & certainty
Strategic objectives
Costs of expansion and operation
Several components go into calculating how much to increase capacity or if it is cost effective to increase. A careful analysis of these factors should be considered before a company makes the decision to increase capacity.

13. Capacity Lag Strategy Increase capacity after demand has increased.
This is a conservative strategy and may result in lose of customers.
You assume customers will return after capacity has been met.
A more conservative strategy is increasing capacity after the demand has increased. The company using this strategy will recognize a higher return on investment; however the company would need to calculate if using this strategy would cause the company to lose customers. If the output of the company is unique and competition is very weak, the company may choose to use this strategy. If competition is great and the customer would have other options to obtain the product from, the company would benefit from using a different strategy.
In the example of the hospital hire registered nurses, if the hospital used this strategy they wouldn’t hire registered nurses until they had an increased census in patients. The hospital would save the money in salaries; however, they would take a chance on not being able to hire any registered nurses. They would then have to send patients to other facilities or admit them and provide lesser quality care because they wouldn’t have the staff to care for the patients.

14. Average Capacity Strategy
Average expected demand is calculated and capacity is increased accordingly.
This is the most moderate strategy.
The most moderate of all strategies is the average capacity strategy. The companies are usually confident they can sell at least some of the product produced thereby decreasing costs and increasing profits.
Using this strategy, the hospital would hire registered nurse gradually as the patient census started to increases.

15. Adjustments to Capacity
Increase capacity by:
Adding extra shifts
Scheduling overtime or weekends
Adding equipment and/or personnel
Reduce load by:
Reducing lot sizes
Holding work in production control
Subcontracting work to outside suppliers
Once it is determined adjustments need to be made to capacity, there are several ways they can be made. Some adjustments that can be made if the needed adjustments are to increase capacity would be to increase the number of shifts operating, to increase the hours the workers are working, or to add more equipment or personnel. Another adjustment can be made by reducing the load.
With the hospital scenario, a possible solution might be to hire registered nurses into on-call positions. That would allow the hospital to do the orientation with the new hires, then have them available so they could be called in to fill the shifts when the need arises. The hospital might also look at the current staff to find out if some employees would be available to work more shifts, either overtime or weekends.
Other adjustments the hospital could make is to send the employees home or not call them in to work a scheduled shift if the census is low. They could also consider some temporary employees through contracted agencies.

16. Adjustments to Capacity
Reduce capacity by:
Temporarily reassigning staff
Reducing the length of shifts
Eliminating shifts
Increase load by:
Releasing orders early
Increasing lot sizes
Making items normally outsourced
If the needed adjustments are to reduce capacity, a work center can temporarily reassign staff, reduce the length of shifts or to eliminate some shifts. Adjustments can also be made by increasing the load, perhaps the work center can make items that they have normally outsourced to increase the profit, orders can be made and released to the next work center earlier than originally scheduled or the lot size can be increased.

17. Capacity Planning
Best operating is seldom at 100% and varies with industry.
In industries where demand is highly variable, large capacity cushions are common.
Companies with less flexibility and higher costs maintain small cushions – under 10%.
Overbooking is common with some industries such as airlines.
The best operating rate is seldom 100% however it does vary with industries. In companies where the demand is highly variable, the company may choose to have large cushions. By doing so, they will be able to fulfill the demand for the customer and keep the customer satisfied so they are not tempted to turn to a competitor to obtain the product.
Companies with less flexibility and higher costs would probably choose to maintain a smaller cushion to maintain a higher profit margin. If the product has a very short life or would become outdated very quickly, the company would choose to have a small cushion.
Hotels and airlines often will overbook. They take into consideration that a certain percent of their customers are not going to show up and therefore to maximum their profit they choose to overbook.

18. Economies of Scale Economies of scale is the best operating level.
Economies of scale is the point where it costs less per unit to produce high levels of output.
Occurs when fixed costs are spread over large number of units
Economies of scale is the best operating level; the level at which it costs less per unit to produce. A work center considers spreading fixed costs out over a large number of units, the cost of buying large supply of raw material to obtain quantity discounts, the cost of storing the inventory to determine the best operating level. The more products a work center can produce while not increasing the fixed costs maximizes the profit.

19. Diseconomies of Scale Occurs at a certain level of output.
When fixed costs increase with number of units being produced, examples:
Higher rework
More equipment breakdown
A work center can increase their level of output only to a certain level without reaching diseconomies of scale. Diseconomies of scale occur when higher production results in increased costs. For example, by operating the machinery at 100% of the time may increase profits for a period of time, if the practice is continued the machinery will eventually break down which will ultimately increase costs.

20. What is CRP Used For?
To determine the capability of a system or resource to produce a quantity of output in a particular time period. For example:
Should the hospital hire more registered nurses to care for the projected patient load?
Should the hospital build more rooms for patients?
What is the projected finish time for the current projects?
It is important to understand what CRP is; however you also need to understand what it would be used for. A company would use CRP to determine the quantity of output to do strategic planning for a company. The hospital that was considering the registered nurses, might use CRP to determine if they need to hire them to care for the projected patient load. The hospital might also use CRP to determine is the need is large enough to build more rooms for the expected patients.

21. CRP Produces Load Profile
CRP uses the information to produce a load profile for each machine or work center. A load profile:
Compares released orders and planned orders with the capacity of the work center.
Identifies underloads and overloads.
A CRP system inputs the data to produce a load profile. The hospital would input the current and projected data in the system to identify the registered nurse need.

22. What is a load?
Load refers to the standard hours of work assigned to a facility.
Russell and Taylor
A load is identified as the standard hours of work assigned to a facility. The load needs to be determined to calculate a load percent.

23. What Is Load Percent? Load percent is the ratio of load to capacity.
Load percent = x 100%
Capacity
Russell and Taylor
When you know the load and capacity, you can find the load percent by dividing the load by the capacity and multiplying by A load percent of 100 or less can be accomplished by the work center. If the load percent is greater than 100, adjustments would need to be made.

24. Load % Example
A local road construction company needs to develop engineering specifications prior to doing any pre-surfacing preparation. The company has been awarded the bid on four projects. They have one engineer. It takes 4 hours per mile to develop the engineering specifications. The first project is 30 miles long and must be started by March 15th to complete on schedule. The second project is 20 miles long and must be started by April 1st. The third project is 5 miles long and must be started by May 1st. The fourth project is 15 miles long and must be started by May 23rd. It is now February 15th. The engineer works a 40 hours week and is very experienced so he operates at 100% efficiency. Assume one project can not be started until the previous project is completed. Does the engineer have enough time to accomplish the specifications on time?
This is an example of how CRP would be used in a road construction company to determine if it is cost effective to bid on four projects. By using CRP a company can calculate the load percent and therefore will be able to plan the amount of work they can produce.

25. Engineering Calculations (Capacity)
Numbers of hours = 40
Shifts = 1
Efficiency = 100%
Utilization = 4/5 = 80%
Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours
Project 1 capacity = 4 (weeks) x 32 = 128
Project 2 capacity = 2 (weeks) x 32 = 64
Project 3 capacity = 4 (weeks) x 32 = 128
Project 4 capacity = 3 (weeks) x 32 = 96
Capacity is calculated by taking the number of hours for the project times the number of shifts times the utilization times the efficiency. I have calculated utilization at 80% allowing lunch breaks, time for meetings and other interruptions a worker experienced throughout the workday.
Project 1 is projected to take 4 weeks so the number of hours needed to complete the project (the capacity) is calculated as 128 hours.
Project 2 is projected to take 2 weeks so the capacity is 64 hours.
Project 3 is projected to take 4 weeks so the capacity is 128 hours.
Project 4 is projected to take 3 weeks so the capacity is 96 hours.

26. Engineering Calculations (Load)
Project 1 = 30 x 4 hours per mile = 120 hours
(start by February 15th – must be completed by March 15th)
Project 2 = 20 x 4 hours per mile = 80 hours
(start March 16th – must be completed by April 1st)
Project 3 = 5 x 4 hours per mile = 20 hours
(start April 2nd – must be completed by May 1st)
Project 4 = 15 x 4 hours per mile = 60 hours
(start by May 2nd – must be completed by May 23rd)
To calculate the load we take the miles of the project times the hours it takes per mile.
Project 1 is 30 miles long and it takes 4 hours per mile so the load is calculated at 120 hours.
Project 2 is 20 miles long times the 4 hours per mile so the load for project 2 is 80 hours.
Project 3 is 5 miles long times the 4 hours per mile so the load for project 3 is 20 hours.
Project 4 is 15 miles long times the 4 hours per mile so the load for project 4 is 60 hours.

27. Engineering Calculations (Load %)
Project 1 = 120/128 = 94%
Can be completed
Project 2 = 80/64 = 125%
Can not be completed
Project 3 = 20/128 = 16%
Project 4 = 60/96 = 63%
To determine if the projects can be completed, we calculate the load percent which is done by dividing the load by the capacity.
Project 1 has a capacity of 128 and a load of 120 so to determine if the project can be completed on schedule we divide the load by the capacity.
120 divided by 128 = 94% which means the project can be completed on schedule
Project 2 has a capacity of 64 and a load of 80 with a load percent of 125% which means it can not be completed on schedule unless load adjustments are made.
Project 3 has a capacity of 128 and a load of 20 which gives it a load percent of 16% so it can be completed on schedule.
Project 4 has a capacity of 96 and a load of 60 which gives it a load percent of 63% so it can also be completed on schedule.

28. Road Construction Bidding
In analyzing the engineering calculations, the company must decide if it cost effective to accept the bid on project 2. Based on the current capacity, the engineer is not able to complete the engineering specifications as needed. If the company accepts the bid, one of the following adjustments will need to be made:
Add extra shift (weekend or evening)
Schedule overtime
Add personnel temporarily
There are several adjustments the company could calculate to determine if is cost effective to bid on project 2. The adjustments include adding extra shifts, which would require having the engineer work overtime by working evenings or weekends. Another alternative would be adding a temporary engineer to assist the current staff. All of the costs on these adjustments will be calculated by the company prior to submitting a bid on the project or if a bid is submitted the additional costs involved with these adjustments will be added onto the bid when submitted. By using Capacity Requirements Planning the company will take all costs into consideration when submitting a bid. Without a method of calculating the costs, the company could submit the bid only to find that the actual cost of the project is more than the bid submitted and they will lose money on the project.

29. Test Exercise of Load %
A local hospital prides themselves in top quality patient care. They have 5 registered nurses on each of the 3 shifts and each nurse cares for 5 patients. Each patient requires 1.5 hours of RNs time. For week one they have projected the patient load to be 200 patients, week two the patient load will be 225 patients, week three the patient load will be 180 patients and week four the patient load will be 195 patients. The staff consists of about 30% student graduate RNs; therefore the efficiency is 70%. Each nurse works 36 hours per week. Does the hospital have sufficient staff to provide care for the patients?
Registered Nurse Calculations (Capacity)
Number of hours = 36
Shifts = 5 x 3 = 15
Utilization = 4/5 = 80%
Efficiency = 70%
Capacity = 36 x 15 x 0.80 x 0.70 = hours
Week 1 = 200 x 1.5 = 300
Week 2 = 225 x 1.5 = 337.5
Week 3 = 180 x 1.5 = 270
Week 4 = 195 x 1.5 = 292.5
Week 1 = 300 / = 99% = Can be accomplished
Week 2 = / = 111.6% = Can not be accomplished
Week 3 = 270 / = 89% = Can be accomplished
Week 4 = / = 97% = Can be accomplished

30. Summary
To operate at maximum capacity, companies must use the resources available. If resources under underutilized, the profit margin will not be maximum.
Using capacity requirements planning helps a company identify potential problems, such as eliminating the possibility of overworking the current staff, overloading machines, losing customers because the work could not be completed as scheduled, paying penalties for late delivery.
In summary, CRP is an important tool for a company to use in its strategic planning. It enables a company to determine the resources available to operate at maximum capacity. By operating at maximum capacity, a company will be able to do strategic planning to optimize their profit. CRP also allows a company to identify potential problems and prevent them before the become problems. Therefore, many problems can be eliminated with the use of the CRP.

31. Resources
Russell, Roberta A. and Bernard W. Taylor III Operations Management. 4th ed. New Jersey: Prentice Hall 2003
“Capacity Requirement Planning” MGT 651 –IV, Dr. Ozatalay