What is capacity planning?
Capacity planning is the production planning strategy that ensures a business’s supply chain and factors of production, such as raw materials, equipment, facilities and work hours, can meet market demand throughout the business cycle. This is difficult because you want to have enough for high-demand seasons to avoid losing revenue but not too much in low-demand seasons, which is wasteful.
Through capacity planning, businesses can determine how and when to scale operations, invest in better or more production capacity, remove productivity barriers and mitigate business risk. The planning can project three, six, nine or 12 months into the future, according to the nature of business and the length of your typical business cycle.
An effective capacity planning strategy defines how many resources will be needed to fulfill customer orders promptly. Keep in mind that customer demands are often not static. However, the business must evolve to meet these demands or risk losing business to competitors.
The factors of production often require financial investments, and some need to be built over time. Therefore, the business should acquire all resources in time to fulfill demand and decide what to do with additional capacity when demand wanes to prevent wastage.
Capacity planning vs. resource planning
Resource planning and capacity planning have many points of congruence, but they aren’t the same. The simplest explanation is that resource planning is a subset of capacity planning.
Capacity planning occurs at a higher level — to decide the investments or projects to undertake. Resource planning, in contrast, is the more detailed/fragmented aspect — the management of supply chain materials, teams and individuals, as well as the optimization of roles and skills and their availability and costs.
Capacity planning seeks to resolve the challenges of a short-term resource planning mindset. It focuses on deciding which projects to take, reject and defer. Resource planning defines the resources for specific projects once the decision has been made.
Forecasting and planning in the modern marketplace are challenging, and responsiveness to change is another layer that capacity planning has taken on. Annual capacity planning shouldn’t be limited to a yearly event. Organizations must find proactive ways to refine and iterate capacity and resources to meet evolving demands. Software tools are invaluable to this process.
3 aspects of capacity planning
There are three main types of capacity planning, divided according to the significant resources to plan for in the short and long term. Remember, the best capacity plan should project for months — ideally one year — into the future.
- Product planning: Product capacity planning allocates the raw materials (for manufacturers) or products (for retailers) that go into making your deliverables. For example, a salon needs hair and beauty products as well as things like towels and capes.
- Workforce/labor planning entails organizing the team members and work hours available for projects/jobs. During workforce planning, you can define staffing needs to relevant stakeholders and highlight when the business needs more or fewer employees. Once defined, you can plan for recruiting and onboarding to ensure the workforce is ready for the peak season’s demands.
- Tool/equipment planning defines the tools, equipment and facilities needed to complete various projects. These might include assembly line components, large equipment and machinery and small devices. In the salon capacity planning example, tool planning focuses on appliances and fixed assets such as chairs, mirrors, floor space and spa beds.
The 4 strategies of capacity planning
The lead strategy
The lead strategy applies one of the most audacious capacity planning approaches. Here, the business makes an upfront investment toward more capacity than it needs before demand peaks.
Strong businesses with financial muscle often use this strategy to gain a competitive edge over their counterparts. However, it can also be a helpful strategy for companies prone to inventory shortages during peak demand seasons.
The lead strategy can prove costly if actual demand fails to meet the predicted levels. At this point, the business will have excess inventory that should be stored or disposed of and production capacity that remains idle. It also doesn’t respond well to a rapidly evolving marketplace.
The lag strategy
This is a more conservative capacity planning approach. It waits until current capacity is stretched almost to the braking point before investing in additional capacity. Here, the business responds to actual demand to minimize wastage of resources. Small to mid-sized companies often use this strategy to reduce operating costs.
The lag strategy is cheaper and more economical, but it relies on a fully functional supply chain. Otherwise, the business may lose revenue to competitors if they can’t fulfill orders on demand due to lack of capacity.
The match strategy
The match strategy borrows both the lead and lag strategies to balance demand and supply. Rather than increasing capacity in advance or after demand peaks, the match strategy makes small incremental capacity changes ahead of peak demand season. It also responds well to fluctuating demand conditions.
The match strategy is ideal for businesses in all industries. However, it’s more complex to run and can benefit from investment in data, such as historical and predictive analytics, and market research to inform planning decisions.
The dynamic strategy
The dynamic capacity planning strategy is relatively new and safer since it’s data-driven. It’s a tweak of the match strategy in that it leverages data to provide actual sales and demand forecast figures to add corresponding capacity, large or small. It is more accurate and better optimizes the strengths and weaknesses of the first two strategies.
Steps to effective capacity planning
For most businesses, capacity planning follows three basic steps:
Step 1: Measurement
You begin by measuring your resource capacity. Assuming you run a restaurant that provides home deliveries:
- How many orders can you handle in one hour?
- How many riders or drivers do you have, and how long do they take to deliver within your predefined radius?
- How many kitchen staff do you have, and how much can they do?
- Where do you get and how do you store your perishable and nonperishable ingredients?
It’s critical to examine your capacity objectively, meaning what it is and not what you hope it becomes. Historical data can help you define your resources and capabilities objectively.
At this stage, for a manufacturing business, you will break down your production strategy into various categories and define user expectations for each. Build a structured workflow and decide the organization of the work tasks according to complexity or availability of labor.
Step 2: Analysis
Having accurately measured your resources and workflows, analyze the information to determine whether your current capacity is insufficient, optimal or excessive. For example, you can use capacity-planning software or graphical tools to map out the available resources vis-à-vis your workload throughout the business cycle.
At this stage, the manufacturing business should compare specific workload measurements with overall job objectives and define resource utilization throughout the production line. For example, you can quickly identify where you have resource gaps and excesses and determine which workloads consume the largest amount of time, resources and labor. These are the workloads likely to cause production bottlenecks during peak demand seasons.
Step 3: Formulation and planning
Finally, using information from steps 1 and 2, you can delve into actual capacity planning. Here, you should calculate the cost of funding new projects, including hiring additional people, investing in better or bigger equipment or ordering and storing more raw materials.
Suppose you have the forecasted sales and demands. In that case, you can easily calculate the ROI for financially significant investments such as full-time employees or costly machinery. Therefore, it’s critical to project various scenarios and their outcomes during formulation to make the best decisions.
The goal of formulation is to optimize your needs against your production capacity to ensure you can meet market demand. For example, you can ease bottlenecks and plan for temporary or permanent solutions to insufficient capacity over the forecasted time.
Effective capacity planning: The roadmap to business success
The core of capacity planning is to create an actionable plan for the growth of the business. Short and long-term capacity planning can reveal a business’s strengths and weaknesses. It allows the business to make informed decisions on scaling operations and increasing profitability. Effective capacity planning is critical to overcoming the obstacles that can cause them to fail.
