Capacity planning is defined as a method to gauge the production capacity needed to meet the changing product demands of an organization. Two terms of design capacity and effective capacity are used extensively in the context of capacity planning.
The first is the maximum work that is completed in a specific period by an organization, and the latter is the maximum it is capable of completing in a specific period in spite of limitations like material handling, delays, and problems.
Meaning of capacity planning
Capacity planning is described as a tool to minimize the discrepancy between the capacity of a business entity and customer demands.
Demand for capacity is variable as it is based on changes in production output of an existing product or in the production of a new product. Capacity can be maximized by introducing new materials, machinery, techniques, and labor force.
Capacity planning is used for determining the kind of equipment capacities and labor required and when they are needed. In simple terms, it is the ability to produce, store, and achieve as it is referred to as the process to determine the best utilization of resources.
Besides other business entities, it is also used in information technology and business computing. The capacity planning for IT includes estimating computer storage, software, hardware, and connection infrastructure resources that are needed over a given time period.
Capacity planning in IT industry is defined as a systematic approach that is taken for making plans about future IT resources in terms of growth, demand, and current operations.
Strategies of capacity planning
The primary strategies that an organization can use for capacity planning are as follows-
#1. Lead Strategy –
This is considered one of the most aggressive stances and strategies of capacity planning. It is an approach where the company anticipates an increase in demand and thus increases its production capacity beforehand.
The management uses lead strategy as an important tool to attract customers towards its own products and away from those of rival companies, especially because of inventory shortage during high demands. It also tries to minimize stockout costs.
There are several benefits of the Lead strategy, and this is why it is a favorite of entities. One of the disadvantages of lead strategy is that if the demand does not rise than the organization is stuck with the additional inventory.
#2. Lag Strategy –
This strategy is somewhat different from the previous one as the organization responds to the cry of high demand by boosting its production capacity after the entity has started running at full power.
It does not increase production on mere assumptions as it needs the fact and figures and then only starts to act on it.
The benefits of Lag Strategy is that the company does not have any additional inventory with it, there is a minimum risk of overproduction, and putting away large investments as long as it is not necessary.
The disadvantage is that the company does not have any additional inventory with it in case of sudden high demand. By the time the company doles out the extra inventory, either the demand decreases or the customers have already become loyal to some other brand.
#3. Match Strategy –
This is considered a moderate strategy as it is an integration of both Lead and Lag strategies. It does not assume and anticipate very high demand and start building accordingly, nor does it sit idle until the so-called high demand is at your door.
Instead, the Match Strategy make small modifications, and this depends on the changing market conditions. It is no doubt a bit hard to accomplish, but the risk is very less comparatively.
#4. Adjustment strategy –
This strategy involves either reducing or adding to the capacity in small amounts depending upon the prevalent consumer demand. The adjustment strategy can also take place because of some important changes in the product.
Importance of capacity planning
The advantages of capacity planning are as follows-
#1. Minimizing resource costs
It is the process of capacity planning that helps an organization to meet the future resource needs effectively. It lets you see the workings of every individual so that the company can make viable changes to future assignments based on the availability and skills of the team.
It is the capacity planning that helps a business entity to make choices about resource management so that you can minimize resource costs.
#2. Information –
A capacity planning method helps to accumulate digital information on a regular basis that will prove beneficial in the growth of the company.
#3. Monitoring costs –
An organization can easily monitor costs during recession and growths with the help of capacity planning as it takes into account supplies and schedules of production, facilities, and personnel.
The planning process allows the organization to make a viable budget and allocate financial resources where they are needed, developing shipping schedules for the finished product and delivery schedule for supplies.
#4. Ensures availability –
The capacity planning report shows you whether you have the scope to accept new projects. Do you need to outsource or are your resources enough is an important question that is easily answered via this method?
#5. Production cycles –
An organization uses the process of capacity planning to maintain the necessary production cycle so that it does not have to stay behind during high demands.
There are certain products which have seasonal demand, for example, an umbrella or a raincoat and if you are dealing in these products, you can take help of capacity planning to work in accordance of the expected demands.
The capacity planning will even help in recognizing the downward slide so that you can halt the process as you wish.
#6. Managing skills inventory
Capacity planning is linked with the skills inventory of a team, and it informs which member has the necessary skills for a particular job. It becomes easy to allocate resources as per needed.
#7. New locations
When a business entity starts on the path of growth and prosperity, it needs further space. This is the time when capacity planning proves its worth and helps to develop an accurate estimate in terms of expected production from the new location.
Procedure for capacity planning
The procedure for capacity planning includes
#1. Assessing existing capacity
The first step in the procedure of capacity planning includes measuring the unit capacity in terms of input or output. Input measure is apt for the service industry, for instance, restaurants, airline sector, hospitals, universities, and theatres.
Output measure is apt for manufacturing sectors like brewery, iron and steel, automotive, power, and cannery.
#2. Forecasting capacity needs
Forecasting capacity needs for the short term is any day easy than for long-term requirement. It is the capacity forecast that gives the organization a helping hand by determining the gap between existing and estimated capacity.
This will help in making the necessary adjustments.
#3. Identifying alternatives
There is a need for expansion to meet the forecast capacity, and for this, a company might have to start additional shifts. This will help to meet the forecast demand. It is vital to identify and evaluate alternatives for both capacity increase and decrease from different viewpoints.
The organization can use Queuing theory and Cost-Benefit Analysis for getting an estimate about alternatives.