Capacity planning balances production resources, labor, and final production to meet consumer demand and increase profits. The process varies by industry, but involves adjusting production quantity based on anticipated demand and using strategies such as adding capacity, meeting increased demand as it occurs, or incrementally increasing capacity.
Capacity planning is any strategy used to identify the amount of production needed to satisfy demand for the 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 actual capacity planning process varies somewhat from industry to industry. While there are industry-unique factors that help shape the approach to effective planning, there are some basic elements that tend to apply in any situation. Many of these have to do with adjusting the production quantity based on anticipated demand for the products now and in the coming production periods.
A simple formula for capacity planning in manufacturing situations involves identifying the number of machines used in the production process, along with the work required to operate those machines. This value is then multiplied by the number of work shifts the facility operates continuously. For example, if the idea was to determine capacity planning per day and the factory operates 24 hours a day, using eight-hour shifts, the number of work shifts used would be three. Finally, factors such as raw material utilization and the efficiency rate of the production process will also impact the total capacity planning process.
With most attempts at capacity planning, a variety of approaches will be taken to maximize the efficiency of the production process. One approach is known as the main strategy. This is simply the process of adding capacity, as there are indicators that demand will increase within a certain period of time. The idea here is to prepare for the increased demand for manufactured goods that can be stored and used to meet the increased demand at the start. If the anticipated increase in demand does not materialize, businesses are left with high inventory, which in turn increases their cost of operation.
Another approach to capacity planning is known as a lag strategy. Here, the idea is to meet increased demand as it occurs, rather than preparing in advance. This can be achieved by running more machines or expanding the manufacturing effort from five days a week to also operate on Saturdays and Sundays. While the possibility of accumulating large inventories that do not move is reduced, there is a chance of losing customers to the competition if production cannot meet demand in a timely manner.
The matching strategy is a third approach to capacity planning and is sometimes seen as a compromise between the lag and leadership strategies. With the matching strategy, the idea is to incrementally increase capacity as demand starts to increase. If handled very carefully, this approach allows the supplier to always stay a little ahead of demand and fulfill orders without delay. At the same time, it minimizes the potential for an unnecessarily large inventory to build up.
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