What is Capacity Planning and Why Should You Care?

How to use the maximum amount of what you have to meet current and future demands. It may not sound like a difficult thing to do, yet there are numerous software packages, tools, and processes designed to accomplish this task across multiple industries. So then, let’s look at what capacity planning entails and then why we are spending so much money and time on tools in order to figure out exactly how to do it.

First you have to actually know how much you have to start with. How many people or labor hours? How many machines? How many trucks? How many of whatever it is your company is using to produce something to the market?

Let’s use time as our capacity example, because almost every company needs people. The combined number of hours each of them spends per week is your weekly labor capacity. Let’s say a company has 100 people making widgets. They all work 8 hours per day for 5 days, or 40 hours per week. 100 x 40 = 4000 hours. Simple. My fake company has 4000 hours’ worth of time to dedicate to making widgets.

But what if because it’s the Fourth of July holiday, there are going to be 10 people gone for three days out of the week? The capacity for making widgets for that week changes, right? We now have 90 employees at 40 hours which is 3600 hours and 10 people at 16 hours = 160 hours, for a total of 3760 hours.

So, you can see how capacity is not a static number across all weeks or months. This is important because the number of widgets that need to be made might be 100 people working 40 hours every week. So, how are you going to still make everything you need to make?

Being able to see where and how these changes occur over the course of the month gives a company the ability to change staffing or adjust the quantity of what is needed to accommodate the customers’ demands.

This is just part of our overall capacity planning, though…there’s still more.

Capacity Planning Methods: Lag vs. Lead vs. Match

Let’s talk about how many widgets we need. How do we know how many we need? Demand is determined by how much our customers want. Sometimes we know this information because we have actual orders in hand. Companies will wait until they have this before they start production and will only increase or change the capacity once what they have is completely exhausted. This is called the “Lag” method. A company will have to adjust their staffing needs after they know exactly what the customer wants and when.

Some companies want to try to predict or anticipate what the demand is going to be. This method is called “Lead”. If you anticipate correctly, then a company will already be ready to meet the demands when they happen, rather than having to “ramp up” resources. This can be extremely difficult to do and extremely risky.

The last method in capacity planning is the “match” method. Using the match method, a company is going to adjust their capacity incrementally according to what is needed. They are going to have actual demand from customers, but not wait until all resources are at full capacity before making small adjustments to increase.

Why capacity planning matters

So, what does this all mean and why do we care? The bottom line is, of course, dollars and wasting them.

If a company has too many resources that are not being used or are “under-utilized”, then they are wasting their dollars on unneeded resources. If a company waits to increase capacity after it is already needed, they risk losing customers – which in turn also means they would lose dollars. In manufacturing environments, there are even more constraints and factors that need to be considered because of the complexity of machinery involved to make a product.

Overall, capacity planning is not as simple as it sounds and companies are spending lot of time, effort, and money to figure out the right formula for them in order to not only meet customer demands, but grow and prosper. One of the ways companies invest in figuring out the complexities of capacity planning is by using software that helps them capture and manage the resource data they need to plan smarter. Time tracking, resource management, workforce management, and PPM (project portfolio management) are examples of solutions that can provide inputs into your capacity planning.

In future posts, we’ll explore the roles that different software solutions play in providing much-needed data for better capacity planning.