Capacity Requirement

Planning

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Capacity
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.

By calculating the capacity, the company can determine

if they are capable of completing the project within the
timeframe required.

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Capacity
The basic questions in capacity planning are:

What kind of capacity is needed?

How much is needed?
When is it needed?

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 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.

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 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.

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Capacity
Total (design) capacity
Maximum output rate or service capacity an operation,
process, or facility is designed

Effective capacity
Design capacity minus planned losses such as
meetings, preventive maintenance, lunch / natural call
breaks

Actual output
Rate of output actually achieved, cannot exceed
effective capacity. It minus all unplanned losses such as
accidents, machine / tool breakdown, fire, etc. 6
Capacity
Capacity Cushion:
The amount of reserved capacity that a firm
maintains to handle sudden increases in demand
or temporary losses of production capacity.

Capacity Cushion = 1 - Utilization

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Efficiency and Utilization
Efficiency: It is the measure of how well a facility or
machine is performing when used
Actual output
Efficiency =
Effective capacity

Utilization: It is the measure of planned or actual capacity

usage of a facility, work center, or machine
Actual output
Utilization =
Total capacity

Both measures are expressed as percentages

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 Ice Cream Division Canned Food Division
Efficiency = Actual output Efficiency = Actual output
Effective capacity Effective capacity

= 3724 = 90.08% = 4622 = 85.01%

4134 5437

Planned Avoidable Planned Avoidable

Loss Loss Loss Loss
Total Total 2459 hrs
Capacity 3762 hrs 410 Capacity 815
hrs hrs
7896 hrs 7896 hrs
Effective
Effective Capacity
Capacity
Actual Actual
4134 hrs Output 5437 hrs Output
4622 hrs.
3724 hrs

Utilization = Actual output Utilization = Actual output

Total capacity Total capacity
3724 4622
= = 47.16% = = 58.54%
7896 7896

Utilization and efficiency measures for two divisions of a

food processing company 9
 Capacity Planning
Best operating is seldom at 100% utilization 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.

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 Capacity Planning
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.

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Capacity Requirement Planning
Capacity Requirement Planning is a computerized technique for
projecting resource requirements for critical work stations.

Inputs:
 Planned order releases
(forecasted & customer orders)
 Routing file
(equipment & labour)
 Open orders file

Outputs:
 Load Profile for each work center

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 Capacity Requirement 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 facility have sufficient capacity available to

meet the capacity requirements for MRP plans.

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Terminologies
• Planned Order Releases: Information from the
Material Requirements Planning which tells when to
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.

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 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?

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Capacity Strategy Formulation

Capacity strategy for long-term demand will depend on ..

 Expected demand patterns

 Expected growth rate and variability of demands
 Facilities
 Cost of building and operating
 Technological changes
 Rate and direction of technology changes
 Behavior of competitors
 Availability of capital and other inputs

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In the real world, we need to manage this
capacity …

but this is too complex to

start out with

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How to learn capacity management by
meditating about …

Funnel Sand

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 The Metaphor
RAW
MATERIALS

FACTORY CAPACITY =
CAPACITY 200 grains of sand/minute

FACTORY
OUTPUT
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 What are the problems with these two
production systems?
DEMAND = 200 grains/minute DEMAND = 100 grains/minute

200 grains/minute
100 grains/minute

100 grains/minute
200 grains/minute

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 Creating a balanced production system can be fairly
easy in simple systems

200 grains/minute
each
100 grains/minute

200 grains/minute
200 grains/minute

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 How to identify Bottleneck processing stage in
the following cases …….

100 200
100 grains/minute 400

200
100
200 grains/minute

200

400 400

400 grains/minute
100
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Easy to identify the bottleneck stage(s) by observing
where inventory builds up …

200 400
100

200

100

200

400 400

100
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Basic funnel management questions of
interest?
• How much sand should we allow into the system
of funnels?
– Should we limit the amount of sand that we
put in?
• How many funnels should we have?
• How big should our funnels be?
• What kind of funnels should they be?
• When should we add funnels?

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 There are several ways to increase capacity …

100 grains/minute
“scale up”
modify your funnel or
get a bigger funnel

400 grains/minute

“scale out”

get more funnels

change technology
to big-mouth funnel
400 grains/minute 4 funnels X 100 grains/minute = 400 grains/minute 25
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

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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 in the facility which is normally outsourced

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Economies of Scale
 Economies of scale is the best operating level.
 It is the point where it costs less per unit to
produce high levels of output.
 It occurs when fixed costs are spread over large
number of units
 The more products a work center can produce
while not increasing the fixed costs maximizes
the profit.

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Economies & Diseconomies of
Scale

250-bed 750-bed
hospital hospital
(dollars per patient)

500-bed
Average unit cost

hospital

Economies Diseconomies
of scale of scale

Output rate (patients per week)

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Diseconomies of Scale
• Diseconomies of scale occurs when fixed costs increase
with number of units being produced, examples:
• Higher rework
• More equipment breakdown
• It occurs 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.

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Capacity Timing and Sizing
Following are the common capacity strategies:

1. Capacity Lead Strategy

(Expansionist strategy)

2. Capacity Lag Strategy

(Wait-and-see strategy)

3.Average Capacity Strategy

(Combination of strategies)

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Capacity Lead Strategy
• In anticipation of demand, capacity is increased.
• This is an aggressive strategy and is used to lure
customers away from competitors.

Units
Capacity

Demand

Time

Capacity lead strategy

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Capacity Lead Strategy
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.

The hospital may decide to hire the registered nurses

before a competing hospital hires them. The hospital would
have higher costs with the increased staff but they may
decide it is worth the higher costs to ensure the staff will be
there when needed.

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Capacity Lag Strategy
• Increase capacity after demand has increased.
• This is a conservative strategy and may result in loss of
customers.
• You assume customers will return after capacity has
been met.
• Maintains little or no capacity cushion
Units
Demand

Capacity

Time
Capacity lag strategy 34
Capacity Lag Strategy
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.

Example: 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 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.

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Average Capacity Strategy
• Average expected demand is calculated and capacity is
increased accordingly.
• This is the most moderate strategy.
• Trying to match capacity and demand
Units

Example: Using this Capacity

strategy, the hospital would
hire registered nurse
gradually as the patient Demand
census started to increases.

Time
Average capacity strategy
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 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 under-loads and overloads.

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 What is a load?
Load refers to the standard hours of work (or equivalent units of production) assigned to a facility.

Load percent is the ratio of load to capacity.

Load
Load percent = x 100%
Capacity

What is load percent?

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Example - 1
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 completed
by March 15th. The second project is 20 miles long and must be
completed by April 1st. The third project is 5 miles long and must be
completed by May 1st. The fourth project is 15 miles long and must be
completed 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?

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Engineering Calculations (Capacity)
Numbers of hours = 40
Shifts = 1
Efficiency = 100%
Utilization = 80% (allowing lunch breaks, meetings etc.)
Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours

Project 1 capacity = 4 (weeks) x 32 = 128 hours

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

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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)

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 Engineering Calculations (Load %)
• Project 1 = 120/128 = 94%
– Can be completed
• Project 2 = 80/64 = 125%
– Can not be completed on schedule unless load/capacity
adjustments are made.
• Project 3 = 20/128 = 16%
– Can be completed
• Project 4 = 60/96 = 63%
– Can be completed

Systems with a Load Percent over 100 will not complete

assignments on time without adjustments to the system.

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Solutions to Overloaded Conditions
• Eliminate unnecessary requirements.
• Reroute jobs or labor.
• Splitting the job between two systems.
• Increase normal capacity.
• Subcontract.
• Increase efficiency.

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Steps in the Capacity Planning
Process
1. Estimate capacity requirements
2. Evaluate capacity gaps
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative and implement
7. Monitor results

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Systematic Approach to Capacity
Decisions
If one service or product is produced, the capacity
requirement, M, is

Capacity Processing hours required for year’s demand

requirement = Hours available from a single capacity unit
(such as an employee or machine) per year,
after deducting desired cushion
Dp
M=
N[1 – (C/100)]
where
D= demand forecast for the year (number of customers
serviced or units of product)
p= processing time (in hours per customer served or unit
produced)
N= total number of hours per year during which the process
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operates
 Systematic Approach to Capacity
Decisions
Setup times may be required if multiple products
are produced
Processing and setup hours required for
year’s demand, summed over all services
Capacity or products
requirement = Hours available from a single capacity unit
per year, after deducting desired cushion

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 2 + … +

[Dp + (D/Q)s]product n
M=
N[1 – (C/100)]
here
Q= number of units in each lot
s= setup time (in hours) per lot

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Example – 2 : Estimate Capacity
Requirements
• A copy center prepares bound reports for 2 clients. The center
makes multiple copies of each report. The processing time to run,
collate, and bind each copy depends on the number of pages.
• The center operates 250 days/year, 8 hours/day. Management
believes that a capacity cushion of 15% is best.
• Based on the following table of information, determine how many
machines are needed at the copy center?

Item Client X Client Y

Annual demand forecast (copies) 2000 6000
Standard processing time (hours/copy) 0.5 0.7
Average lot size (copies per period) 20 30
Standard setup time (hours) 0.25 0.40
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Estimate Capacity Requirements

• Di = number of units forecast per year, item i

• Pi = processing time (hours per unit or
customer), item i
• Qi = lot size, item i
• Si = set-up time, item i
• N = total number of hours per year during
which process operates,
• C = desired capacity cushion.

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 Estimate Capacity Requirements

M
 D1  p1   D1 / Q1   S1    D2  p 2   D2 / Q2   S2 
N  (1  C )
100

M
 2,000  0.5   2,000 / 20  0.25   6,000  0.7   6,000 / 30  0.40
 3.12  4.
(250 days / yr.)  (8 hours / day)  (1  15 )
100

Rounding up to the next integer gives a requirement of four

machines.

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Example-3: Identify Gaps
Ginsoy is experiencing a boom in business. The owner
expects to serve a total of 80,000 meals this year. Although
the kitchen is operating at 100% capacity, the dining room can
handle a total of 105,000 diners/year. Forecasted demand for
the next 5 years is as follows:

Year 1 90,000 meals Year 4 120,000 meals

Year 2 100,000 meals Year 5 130,000 meals
Year 3 110,000 meals

What are the capacity gaps in Ginsoy’s kitchen and dining

room through year 5?

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Example-3: Identify Gaps
Solution: The kitchen is currently the bottleneck at a capacity
of 80,000 meals/year. Based on the forecast, the capacity gap
for the kitchen is:
Year 1 90,000-80,000 =10,000 Year 4 120,000-80,000 =40,000
Year 2 100,000-80,000 =20,000 Year 5 130,000-80,000 =50,000
Year 3 110,000-80,000 =30,000

Before year 3, the capacity of the dining room (105,000) is

greater than demand. In year 3 and subsequently, there are
capacity gaps for the dining room as well:
Year 3 110,000-105,000 =5,000
Year 4 120,000-105,000 =15,000
Year 5 130,000-105,000 =25,000
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Develop Alternative
• The next step is to develop alternative plans
to cope with projected gaps.
• One alternative, called the base case, is to do
nothing and simply lose orders from any
demand that exceeds capacity and maintain
the quality & price.
• Other alternatives are various timing and
sizing options for adding new capacity.

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