What’s Capacity Planning?

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Capacity planning is any strategy used to identify the amount of production required to meet the demand for goods and services produced by a company. The idea is to balance purchasing resources, maintaining production facilities, hiring labor and final production so that consumers have a constant supply of the products they want. At the same time, capacity planning also seeks to increase profits by eliminating unnecessary waste, including overproduction of any good or service.

The current capacity planning process will vary slightly from industry to industry. While there are factors unique to each industry that help shape the approach to effective planning, there are a few basic elements that tend to apply in every situation. Many of these have to do with adjusting production quantity based on anticipated demand for products, both now and in upcoming production periods.

A simple formula for capacity planning in manufacturing situations involves identifying the number of machines used in the manufacturing process, along with the manpower required to operate those machines. That figure is then multiplied by the number of shifts the facility operates on a continuous basis. For example, if the idea was to determine daily capacity planning and the plant operated around the clock with eight-hour shifts, the number of work shifts used would be three. Finally, factors such as raw material usage and efficiency rate of the production process will also affect the total capacity planning process.

With most capacity planning attempts, various approaches will be taken to maximize the efficiency of the manufacturing process. One approach is known as a master strategy. This is simply the process of adding capacity because there are indicators that demand will increase within a certain period of time. The idea here is to prepare for increased demand by producing goods that can be stored and used to meet the higher demand at the start. If the anticipated increase in demand does not materialize, the business is left with high inventory, which in turn increases its operating costs.

Another approach to capacity planning is known as a lag strategy. The idea here is to meet growing demand as it arises, rather than preparing in advance. This can be accomplished by running more machines or by expanding the production effort from five days a week to also operate on Saturdays and Sundays. While the chance of building up large inventories that don’t move is slim, there is the potential to lose customers to the competition if production can’t meet demand in a timely manner.

The matching strategy is a third approach to capacity planning and is sometimes considered a compromise between lag and lead strategies. With the matching strategy, the idea is to gradually increase capacity as demand starts to increase. If managed very carefully, this approach allows the supplier to always stay slightly ahead of demand and fulfill orders without delay. At the same time, it minimizes the potential for building up an unnecessarily large inventory.

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