No matter how much research you do, there’s always an element of unpredictability to the market—especially when you’re scaling up operations or launching a new product. Remember the viral Dune popcorn bucket? Its creators could never have predicted the novelty item’s runaway popularity, but prior capacity planning allowed them to capitalize on the general rising demand for novelty concessions items by doubling their creative team and opening new manufacturing facilities.
Almost every business, large or small, can benefit from capacity planning, a careful process of projecting demand and aligning it with production capacity. Learn how capacity planning works, why it’s important, and the strategies you can use for your own business.
What is capacity planning?
Capacity planning is the process of assessing the resources a business needs to fulfill production for sales goals. It ensures that the company has enough staff, equipment, and space to meet customer demand, tailoring production to avoid stockouts and excess inventory. Regular capacity planning can help prepare for changes like seasonal shifts in demand, supply chain disruptions, and anticipated market expansion. Plus, it’s a practical step to take when assessing a potential merger or acquisition.
5 steps of capacity planning
- Measure current capacity
- Estimate demand
- Calculate the required capacity
- Identify any capacity shortfalls
- Close the gap
You can get started with the capacity planning process by following these broad steps:
1. Measure current capacity
To measure your current capacity, determine your team’s average output for a given timeframe. For instance, say you run a boutique knitwear brand, and your small team of four can produce an average of 16 sweaters per day—each worker effectively produces four sweaters per day. If a given month has 20 to 22 workdays, your company’s monthly capacity ranges from 320 to 352 sweaters.
You’ll also want to assess the production capacity of other limiting factors in your enterprise, such as machinery, facilities, and software capabilities, as well as inventory (which you can assess using materials requirements planning). This can be useful to identify bottlenecks down the line. If you have two knitting machines that can create the necessary cloth for 20 sweaters per day, for instance, you’ll have excess capacity to ramp up production with an additional hire or by working overtime, if needed.
2. Estimate demand
Determine your business goals and forecast demand to predict future needs. In manufacturing, this information feeds into the master production schedule (MPS), which then guides capacity planning. For a smaller retail enterprise, it might simply manifest as your sales goals for the quarter or year. A good starting point is to analyze your business’s historical sales data, using time series analysis to identify seasonal trends and project likely growth.
From there, consider conducting market research via focus groups, surveys, and a review of expert industry reports, which can provide key information on industry trends and market conditions.
3. Calculate the required capacity
To understand your required capacity, start with your estimated demand, then work backward to calculate the necessary amount of labor and resources needed to meet it.
Returning to the example, let’s say you forecast that demand is 460 sweaters per month. Based on your current capacity, reaching this output would require a team of six and three knitting machines.
4. Identify any capacity shortfalls
Pinpoint discrepancies by comparing your current capacity with the required capacity. This will show whether you’re over-resourced or have a shortfall.
Since your current monthly labor capacity maxes out at 352 sweaters, you’ll likely need to hire two new team members. Further, since your machinery, if used at max capacity, can produce 20 sweaters per day (for a max of 440 per month), then you may also consider investing in a third machine.
5. Close the gap
Fix the gap by aligning your resources with the estimated demand. For example, if your current capacity falls short, consider hiring more staff or extending working hours. At this point, of course, you’ll need to perform some cost-benefit analysis.
For example, how much would it cost to purchase a new machine to close the gap between your current 440 max production capacity and the anticipated demand of 460? If the extra revenue you’d earn from those additional 20 sweaters isn’t enough to cover the costs of the new machine (within an acceptable time frame), it might not be worth the investment.
As your business scales, you’ll likely use capacity planning software. Some degree of capacity planning may be included in your inventory management system (for instance, Katana offers practical resource allocation and production planning tools). Dedicated supply chain management systems like Oracle SCM are practical for companies with complex supply chains.
Benefits of capacity planning
Capacity planning can help your business do the following:
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Determine your salary and hiring budgets. Knowing how much labor your business needs lets you set a budget for hiring and paying staff.
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Save money. With a successful strategy for capacity planning, you can avoid overspending on resources.
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Avoid burnout. Effective capacity planning helps you calculate how many employees you need to avoid a labor shortage and overworking staff.
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Anticipate peak seasons. Looking back at your historical orders can help you find patterns and predict when your business will be busiest, allowing you to plan accordingly.
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Make decisions based on data. Eliminate guesswork with capacity planning and make accurate, data-driven decisions for your business.
Types of capacity planning
Although every business is different, it’s typical to use these three types of capacity planning:
Workforce capacity planning
Workforce capacity planning measures how much work a company can do with its current staff and their available time. Evaluating workforce capacity can help business owners determine whether to hire more people or extend their business hours to meet demand.
For example, if your company employs customer support staff, you might figure out how many workers you need to promptly respond to customer complaints or questions. This number may vary depending on the time of year, and during holidays, you may need to add workers and extend hours.
Product capacity planning
Product capacity planning identifies the products and materials required to fulfill orders. Your planning will evaluate your materials usage during a specific period, helping you forecast your future needs.
For instance, a manufacturing business must understand its resource consumption to determine the raw materials required to complete production and fulfill orders. With this information, you can plan your budget and stock materials accordingly.
Tool capacity planning
Companies can determine which equipment and tools are essential, helping to establish a budget to meet customer demand. Tool capacity planning will depend on each company’s industry, and can range from computers and testing devices to trucks and shovels. This is whatever equipment your employees will use to complete their daily tasks.
3 capacity planning strategies
Capacity planning usually falls into one of the three strategies below:
Lag method
The lag method for capacity planning means waiting until demand exceeds capacity before acquiring more resources. This method responds to present conditions rather than a forecast. While opting for the lag method is conservative, it also has considerable risk. If your business runs short of materials and products, you can lose sales to competitors and alienate customers as you wait to resupply or ramp up output.
Lead method
The lead method uses predictive analysis of future demand to make decisions. It’s ideal for responding to new and growing markets, helping you stay ahead. It’s a more aggressive approach than the lag method, and incorrect projections can lead to excessive spending and overstocking, resulting in higher expenses and risk of monetary loss.
Match method
The match method is a cross between the lead and lag methods. For this hybrid process, you monitor the market while also tracking your capacity and real-time changes in demand. This strategy requires systems that constantly update data, as well as continuous monitoring and rapid adjustments.
Capacity planning FAQ
What are the five steps of capacity planning?
The five steps of capacity planning are: estimate demand, calculate required capacity, measure current capacity, identify any capacity shortfalls, and then close the gap to align your capacity and demand.
What are the three techniques of capacity planning?
The three capacity planning techniques are the lag, lead, and match. The lag method waits until demand exceeds capacity before expending resources. The lead method predicts required resources before demand materializes, while the match method combines the other two approaches.
What are the different types of capacity planning?
Workforce capacity planning evaluates how much work a company can perform with its labor force. Product capacity planning identifies the products and materials required to fulfill orders. Finally, tool capacity planning predicts the tools and equipment your business needs for its workforce.
Is capacity planning the same as resource planning?
While capacity planning focuses on assessing how much capacity your business has to meet broad demand, resource planning is a process you can use internally to allocate workers and resources to individual projects. Your capacity planning efforts are focused on the big picture, and resource planning helps you get there by directing your resource management.
