While stockouts can seem like a minor inconvenience to customers, to businesses they are costly opportunity losses.
Research shows that retailers miss out on nearly $1 trillion in sales because they don't have what customers want to buy on hand. These occurrences are also more common than people might think, with shoppers experiencing stockouts as often as one in three shopping trips.
These issues are usually indicative of a lack of capacity planning. While getting more customers in the sales pipeline is the goal of any business, not having enough product, staff, and resources to accommodate demand increases can lead to supply chain inefficiencies, overworked staff, and late deliveries.
What Is Capacity Planning?
Capacity planning is the practice of determining whether an organization's production line, service department, and workforce are equipped to meet a specific level of demand over a planned period. It allows businesses to know when to scale production, spot bottlenecks, mitigate risks, and adjust the capacity of systems to meet customer demand.
Depending on how the company is set up, this may require steps such as adding shifts, outsourcing processes and functions to third parties, or making investments to improve capacity (e.g., a larger warehouse, new offices, large product floors).
Capacity planning typically begins by first establishing the scope and patterns of demand - a process known as demand forecasting. This step allows the business to understand sales demand and product movement on a weekly, monthly, and yearly basis. Demand forecasting also establishes the organization's production, manufacturing, and distribution capabilities.
When done correctly, this allows business owners and managers to develop a theoretical understanding of their capacity and accurately account for constraints such as downtime, servicing, and unexpected expenses. The planning process can then factor in the available workforce and the number of shifts required to accommodate work to determine actual capacity.
At the micro-level, team leaders can use capacity planning to calculate the maximum number of hours their staff can work over a specific timeframe while taking into account factors such as holidays, sick leave, and support from third parties (e.g., freelancers and contractors).
4 Approaches to Capacity Planning
Different situations may require different approaches to capacity planning. Below are four of the primary capacity planning strategies to consider.
1. Lead Strategy
The lead strategy is an aggressive approach to capacity planning that involves making an upfront investment to increase capacity.
Under this strategy, companies typically increase their capacity ahead of any demand increases. For example, a manufacturer may expand its production capacity, lease a larger warehouse, or acquire inventory in anticipation of the next calendar year.
The lead strategy is typically used to increase market share and to take advantage of competitors that frequently experience inventory shortages, particularly during times of the year when demand is highest. However, the risk with this strategy is that the predicted demand may not match the actual demand, leading to excess inventory and higher stock holding costs.
2. Lag Strategy
The lag strategy is the antithesis of the lead strategy. As its name suggests, this approach involves waiting until a company's current capacity is stretched to an acceptable limit before adding more.
While the lag strategy is more reactive than proactive, the benefit of responding to actual demand increases is that businesses can avoid holding on to too much inventory. However, the lag strategy may lead to brief delays in acquiring inventory, which could lead to losing customers to competitors.
3. Match Strategy
The match strategy straddles the line between the lead and lag strategies. Rather than boosting capacity in advance or increasing the current capacity only when it has been stretched to its limits, the match strategy involves making incremental adjustments to the company's capacity.
These changes are based on the latest market conditions, requiring businesses to track capacity use closely and match demand in increments when necessary. While this strategy requires more complex work, it is generally safer for companies as it is both risk-averse and proactive.
4. Dynamic Strategy
The dynamic strategy is a forecast-driven approach to capacity planning and involves adjusting production in advance.
This is done by combining an analysis of actual demand in real-time and sales forecast figures. However, because the dynamic strategy runs on data-driven forecasts, it is only practical for organizations with reliable capacity planning tools in place.
Key Benefits of Capacity Planning
Capacity planning allows companies of all industries and sizes to become more efficient and capable of delivering the products and services that customers want. Some of the key benefits of this practice include-
A study published in the Harvard Business Review found that of the 71,000 customers that they surveyed, as much as 43% would go to another store if an item they wanted was out of stock.
Customers don't like to wait and if they know they can purchase a product they need elsewhere, they probably won't think twice about taking their business to competitor brands.
Capacity planning allows businesses to see how demand for their products and services fluctuates throughout the week, month, or year. This visibility makes it easier to identify patterns in seasonal demand, which, in turn, allows the organization to scale its capacity up or down accordingly.
Improved Delivery Capacity
Today's customers have higher expectations for delivery. Not only do they want products delivered to their doorstep but they also want faster turnaround times. According to research by PwC, more than 40% of global consumers are willing to pay extra for same-day delivery.
As more consumers shop online, businesses, particularly retailers, need to plan their delivery capacity more carefully. Capacity planning helps businesses ensure that their supply chains are equipped to accommodate rapid deliveries.
For example, a company's logistics department can use capacity planning to make sure it has enough workers available to pick, pack, and deliver orders when needed.
Capacity planning allows businesses to compare future resource utilization against production capacity. Whether it's people, machinery, supplies, or raw materials, capacity planning makes it easy to identify bottlenecks and other inefficiencies that limit their production.
For example, a logistics company using capacity planning may discover that the time it takes for the fleet manager to plan each truck's route is keeping the business from scaling the number of deliveries it can make in a single day.
Despite having the trucks, staff, and products to process and deliver orders, the fleet manager still needs a substantial amount of lead time for route planning. The insights from capacity planning can then lead to the decision to hire more fleet managers or use scheduling software to speed up the fleet manager's work.
Improved Risk Management
Effective capacity planning provides companies with a roadmap that allows them to better understand their strengths, weaknesses, opportunities, and threats (SWOT). This allows business owners and managers to make informed decisions when scaling the business, launching a new product, expanding the product line, pivoting into new markets, or hiring new staff.
Capacity planning also prepares businesses to anticipate disruptions and other obstacles. For instance, it can outline actions to take when a supplier suddenly goes out of business or when a shipment of raw materials arrives with defects.
Primary Types of Capacity Planning
Although there are different areas and processes in an organization that can be optimized by capacity planning, most plans address three primary areas- product, workforce, and tools.
- Product Capacity Planning - Product capacity planning ensures the company has sufficient products or raw materials to manufacture goods. For a restaurant, this would be ingredients and beverages. For a landscaping company, this would be fertilizer and pesticides.
- Workforce Capacity Planning - Workforce capacity planning focuses on making sure businesses have sufficient staff to cover a specified number of hours in a week or month. This type of capacity planning will also reveal whether teams or departments need to hire more employees or bring in contractors or freelancers to keep up with demand.
- Tool Capacity Planning - Tool capacity planning ensures that team members have the tools and resources to perform their work. For manufacturing companies, these tools can include trucks, safety equipment, and knowledge resources.
How to Apply Capacity Planning in a Company's Operations
While capacity planning does not need to be overly complicated, it does require following a series of steps to ensure that business owners and managers are looking at the right things.
1. Identify the Unit of Work - A unit of work can come in the form of gallons per hour, barrels per day, or transactions per week. Units of work can vary from business to business and can also vary from one department or team to another.
2. Create a Workload - Workloads refer to the total number of units produced over time during each stage of the production process. This allows operations managers to define the optimal output of units of work.
3. Produce a Bill of Materials - A bill of materials (BOM) is a list of raw materials, supplies, assemblies, subassemblies, and parts, as well as the cost and quantities of each, required to manufacture a product or deliver a service.
4. Audit Equipment Capacity - This involves evaluating the maximum output of equipment and tools required to manufacture a product or deliver a service.
5. Determine Resource Capacity - Resource capacity refers to the number of team members available to produce units of work required by the BOM.
6. Standardize Processes - Next, create standard times for each process involved in the production and the required resources to complete a task. These measurements should also consider potential disruptions, such as downtime, maintenance, and worker fatigue.
7. Resource Utilization - Resource utilization determines whether resources are used to their maximum potential. As a product metric, it can be used to measure whether teams or individual members are being overutilized or underutilized when completing a task.
8. Determine the Optimal Production Level - At this stage, operations managers can then create a matrix that determines the ideal production level. While it makes sense to aim for 100% productivity on schedule, variables such as available hours, available workers, and process lead times can all affect the ability to meet demand.
9. Prepare for Contingencies - Production in any business, whether it is a restaurant kitchen or an events company, requires balancing inputs and outputs using the available resources over time. However, swings in demand can complicate things even further, overwhelming the company's ability to stay on schedule. Planners must address these constraints and plan accordingly.
10. Measure and Optimize - Having the above steps in place is only the beginning. Managers should continuously measure past performance and improve their capacity plans accordingly.
By creating a high-level capacity plan, businesses can begin implementing data-driven scheduling and demand planning. However, it is important to remember that demand can shift at any time, making it important to continuously revisit and improve the plan.
Capacity planning helps companies deliver on the things that are important to their customers. Incorporating this type of strategic planning into daily processes will help organizations to meet their deadlines, effectively scale production, and increase the bottom line.