DEFINITION of 'Capacity Requirements Planning - CRP'

An accounting method used to determine the available production capacity of a

company. Capacity requirement planning first assesses the schedule of production that
has been planned upon by the company. Then it analyzes the company's actual
production capacity and weighs the two against each other to see if the schedule can be
completed with the current production capacity.

BREAKING DOWN 'Capacity Requirements Planning - CRP'

Capacity requirements planning is an important part of ensuring that a company can
meet production expectations. If a firm fails to take this step before production, it may
find itself unexpectedly unable to produce the amount of goods that it has agreed to
make with its current facilities. This can obviously be disastrous for the firm if it is unable
to meet the requirements of a contract or other formal production agreement.

The process of planning and managing the overall capacity of an organization's

resources. Aggregate capacity management aims to balance capacity and demand in a
cost-effective manner. It is generally medium-term in nature, as opposed to day-to-day
or weekly capacity management. The term "aggregate" denotes the fact that this form of
capacity management considers a resource such as manpower or production capacity
in total, without distinguishing between different types.

For example, in a plant that manufactures various types of computers, aggregate

capacity management would take into account the total number of computers to
be manufactured over a three-month period, without considering the composition
of the product mix desktop, laptop or notebook computers.

Aggregate capacity management is generally a three-step process measuring

aggregate demand and capacity levels for the planning period, identifying
alternative capacity plans in case of demand fluctuations, and choosing an
appropriate capacity plan.

The management of the limits of an organization's resources, such as its labor force,
manufacturing and office space, technology and equipment, raw materials, and inventory.
Capacity management also deals with the capacity of an organization's processes for
example, new product development or marketing as well as with capacity constraints that
arise when various resources are combined. Since capacity constraints in any process or
resource can be a major bottleneck for a company, capacity management is of critical
importance in ensuring that an organization operates smoothly.

Inadequate or improper capacity management can affect a company's financial

performance and impede its business prospects. For example, a company that has introduced
an innovative new product and mounted an aggressive marketing campaign to promote it must
ensure that it has enough manufacturing capacity to meet the expected surge in demand. If
manufacturing capacity is insufficient, the product may be sold out before it is replenished in
retail outlets, which could lead to a shortfall in sales and cause disappointed customers to look
for other alternatives.