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7 Strategic Capacity Planning
Learning Objectives
- What are common capacity strategies?
- Calculate efficiency and utilization measures.
- Describe factors that determine effective capacity.
- Understand the steps in the capacity planning process.
- Determine the capacity in a sequential process with a bottleneck.
- Use break even analysis to evaluate capacity alternatives.
This module examines how important strategic capacity planning is for products and services. The overall objective of strategic capacity planning is to reach an optimal level where production capabilities meet demand. Capacity needs include equipment, space, and employee skills. If production capabilities are not meeting demand, it will result in higher costs, strains on resources, and possible customer loss. It is important to note that capacity planning has many long-term concerns given the long-term commitment of resources.
Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies include leading capacity , where capacity is increased to meet expected demand, and following capacity , where companies wait for demand increases before expanding capabilities. A third approach is tracking capacity , which adds incremental capacity over time to meet demand.
Finally, the two most useful functions of capacity planning are design capacity and effective capacity. Design capacity refers to the maximum designed capacity or output rate and the effective capacity is the design capacity minus personal and other allowances. These two functions of capacity can be used to find the efficiency and utilization. These are calculated by the formulas below:
Efficiency = (Actual Output / Effective Capacity) x 100%
Utilization = (Actual Output / Design Capacity) x 100%
Effective Capacity = Design Capacity – allowances
Actual production last week = 25,000 units
Effective capacity = 28,000 units
Design capacity = 230 units per hour
Factory operates 7 days / week, three 8-hour shifts
- What is the design capacity for one week?
- Calculate the efficiency and utilization rates.
(Using the formulas above)
- Design capacity = (7 x 3 x 8) x (230) = 38,640 units per week
- Utilization = 25,000 / 38,640 = 64.7% Efficiency = 25,000 / 28,000 = 89.3%
Capacity Planning for Products and Services
Capacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short- term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand.
Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs. Capacity can be broken down in two categories: Design Capacity and Effective Capacity.
Three key inputs to capacity planning are:
- The kind of capacity that will be needed
- How much capacity will be needed?
- When will it be needed?
Defining and Measuring Capacity
When selecting a measure of capacity, it is best to choose one that doesn’t need updating. For example, dollar amounts are often a poor measure of capacity (e.g., a restaurant may have capacity of $1 million of sales a year) because price changes over time necessitate updating of that measure.
When dealing with more than one product, it is best to measure capacity in terms of each product. For example, the capacity of a firm is to either produce 100 microwaves or 75 refrigerators. This is less confusing than just saying the capacity is 100 or 75. Another method of measuring capacity is by referring to the availability of inputs. This is usually more helpful if we are dealing with several type of output. Note that one specific measure of capacity can’t be used in all situations; it needs to be tailored to the specific situation at hand. The following table shows examples of both output and input used for capacity measures.
Determinants of Effective Capacity
- Facilities: The size and provision for expansion are key in the design of facilities. Other facility factors include locational factors, such as transportation costs, distance to market, labor supply, and energy sources. The layout of the work area can determine how smoothly work can be performed.
- Product and Service Factors: The more uniform the output, the more opportunities there are for standardization of methods and materials . This leads to greater capacity.
- Process Factors: Quantity capability is an important determinant of capacity, but so is output quality. If the quality does not meet standards, then output rate decreases because of need of inspection and rework activities. Process improvements that increase quality and productivity can result in increased capacity. Another process factor to consider is the time it takes to change over equipment settings for different products or services.
- Human Factors: the tasks that are needed in certain jobs, the array of activities involved, and the training, skill, and experience required to perform a job all affect the potential and actual output. Employee motivation, absenteeism, and labour turnover all affect the output rate as well.
- Policy Factors: Management policy can affect capacity by allowing or disallowing capacity options such as overtime or second or third shifts
- Operational Factors: Scheduling problems may occur when an organization has differences in equipment capabilities among different pieces of equipment or differences in job requirements. Other areas of impact on effective capacity include inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures.
- Supply Chain Factors: Questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle the increase? If capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain?
- External Factors: Minimum quality and performance standards can restrict management’s options for increasing and using capacity.
Inadequate planning can be a major limitation in determining the effective capacity.
The most important parts of effective capacity are process and human factors. Process factors must be efficient and must operate smoothly. If not, the rate of output will dramatically decrease. They must be motivated and have a low absenteeism and labour turnover. In resolving constraint issues, all possible alternative solutions must be evaluated.
- Estimate future capacity requirements
- Evaluate existing capacity and facilities and identify gaps
- Identify alternatives for meeting requirements
- Conduct financial analyses of each alternative
- Assess key qualitative issues for each alternative
- Select the alternative to pursue that will be best in the long term
- Implement the selected alternative
- Monitor results
The above content is an adaptation of Saylor Academy’s BUS300 course. [1]
The Sequential Processes and the Bottleneck
Any process that has several steps, one after another, is considered a sequential process . A good example of these processes is the manufacturing assembly line in which each workstation gets inputs from a previous workstation and give its outputs to the next workstation. It is safe to assume that each step has its own staff member, since this is exactly what happens in assembly lines. For this kind of process, it is crucial to have a balanced time across all steps. That is, there should not be any big difference between the amounts of time that different steps take to process one unit of product. For example, if step 1, 2 and 3 take 3, 10 and 5 minutes consecutively to process one unit of product, two main issues will happen during the production:
1) There will be a big pile of inventory sitting right before step 2, since step 1 is much faster than step 2, and the products that are already processed in step 1 will need to wait for step 2 to be done with its current unit at hand. As a result, this becomes an inventory holding issue, which is costly.
2) Step 3 will always need to wait for step 2 for an extra 5 minutes. This is due to the fact that step 3 finished its current product at hand in 5 minutes, but step 2 needs a total of 10 minutes to finish its work and feed it to step 3. This causes step 3 to be idle for a long time, which is also costly for the company. This is costly, because the company is already paying the staff who works in step 3 for the whole time, but they are not able to produce as many units as they should due to the very slow entry of the inputs coming from step 2.
The bottleneck is the slowest step in each process or the slowest process in a system. The capacity of the bottleneck defines the capacity of the whole process. In our example above, step 2 was the slowest, and as a result, the bottleneck. This means that the whole process (including all steps 1 to 3) will not be able to have an output any faster than one every 10 minutes. In the following, let’s see why this is happening:
In an 8-hour shift per day, we have 8 x 60 = 480 minutes
Assuming that step 1 has enough input to process during the day, the total output from step 1 will be 480 / 3 = 160 units per day. This is the capacity for step 1. In a similar way, the capacity for step 2 is 480 / 10 = 48, and the capacity for step 3 is 480 / 5 = 96 units.
This means that the input to step 2 will be 160 units to be processed. But as we see, step 2 will only be able to process a maximum of 48 units per day. That means that only 48 units get to step 3 for processing. Since step 3 has a capacity of 96 units per day, it will easily process those 48 units of inputs, and the output from step 3 will be 48 units. Because the step 3 is the last step of our process, this output of 48 units will automatically be the total output of the whole process per day.
The key observation here is that the capacity of step 2, which is the bottleneck, determined the capacity of the whole process. This concept is very important in practice. Often times, the companies that do not pay attention to the concept of bottleneck and its implications invest in parts of the process that are not bottleneck. This will keep the bottleneck unchanged and as a result, they will not see any improvement in the capacity of the whole process.
Caroline has a thriving business selling her tote bags through several popular websites. Her business volume has caused her to hire full-time employees. Her business has four main manufacturing operations: 1) cutting fabric (4 min), 2) stitching fabric (7 min), 3) adding zippers, toggles, and liner (10 min), and 4) inspecting, packing, and labeling (5 min).
Employees work 7 hours per day. Help Caroline to determine the following:
- Based on her very high demand, is there a bottleneck and what stage is it? What is the capacity of the process per day?
- Caroline’s employee at step #2 has found a new machine that will enable him to do the stitching faster, at a rate of 5 min per bag instead of 7 min. The machine costs $3500. Would you suggest this is a good investment to help Caroline increase her output? Why or why not?
- If there were another person to be added to the process, where should Caroline add him or her and what would be the new capacity?
(Based on 7×60 = 420 min per day)
Accessible format for Figure 4.4
- The maximum output is 42 units, because that is what the bottleneck can do. The bottleneck is at stage #3, which is the slowest part of the process.
- Caroline should NOT invest any funds into step #2. This may speed up the stitching, but the maximum output of the process will still be 42 units because step #3 has not changed.
- If Caroline added another person, she should add it to step #3. (Install zippers/ toggles/ liner). Because that is where the bottleneck is. The capacity at stage three would now double to 84 units per day. The new capacity for the whole process would now be 60 units per day, as determined by Step 2 (Basic stitching) which is the new bottleneck of the process.
Evaluating Capacity Alternatives
There are two major ways to evaluate the capacity alternatives to select the best one: economic and non-economic.
Economic considerations take into account the cost, useful life, compatibility and revenue for each alternative. Techniques used for evaluation are:
- Break Even Analysis (this is the only one discussed in this chapter)
- Payback Period
- Net Present Value
Non-economic considerations include public opinion, reactions from employees and community pressure.
Break Even Analysis
Basically, since there is usually a fixed cost (FC) associated with the usage of a capacity, we look for the right quantity of output that gives us enough total revenue (TR) to cover for the total cost (TC) that we have to incur. This quantity is called Break-Even Point (BEP), Break-Even Quantity (Q BEP ).
Total cost is the summation of the fixed cost and the total variable cost (VC, which depends on the quantity of output). In other words, at Q BEP , we have: TC = FC + VC
A list of relevant notation can be found below:
TC = total cost FC = total fixed cost VC = total variable cost TR = total revenue v = variable cost per unit R = revenue per unit Q = volume of output Q BEP = break even volume P = profit
Fixed cost is regardless of the quantity of output. Some examples of fixed costs are rental costs, property taxes, equipment costs, heating and cooling expenses, and certain administrative costs
With the above notation and some simplification in the calculation, we have:
TC = FC + VC VC = Q x v TR = Q x r P = TR – TC = Q x r – ( FC + Q x v ) Q BE P = FC / ( r – v )
The management of a pizza place would like to add a new line of small pizza, which will require leasing a new equipment for a monthly payment of $4,000. Variable costs would be $4 per pizza, and pizzas would retail for $9 each.
- How many pizzas must be sold per month in order to break even?
- What would the profit (loss) be if 1200 pizzas are made and sold in a month?
- How many pizzas must be sold to realize a profit of $10,000 per month?
- If demand is expected to be 700 pizzas per month, will this be a profitable investment?
- Q BEP = FC / ( r – v ) = 4000 / (9 – 4) = 800 pizzas per month
- total revenue – total cost = 1200 x 9 – 1200 x 4 = $6000 (i.e. a profit)
- P = $10000 = Q ( r – v ) – FC ; Solving for Q will give us: Q = (10000 + 4000) / (9 – 4) = 2800
- Producing less than 800 (i.e. Q BEP ) pizzas will bring in a loss. Since 700 < 800 ( Q BEP ), it is not a profitable investment.
Finding a break-even point between “make” or “buy” decisions:
Question: For what quantities would buying the product be preferred to making it in-house? For quantities larger than the break-even quantity or for smaller ones?
v m = per unit variable cost of “make” v b = per unit variable cost of “buy”
total cost of “make” = total cost of “buy” = Q x v m + FC = Q x v b = FC = Q x v b – Q x v m = Q = FC / ( v b – v m )
The ABX Company has developed a new product and is wondering if they should make this product in-house or have a capable supplier make the product for them. The costs associated with each option are provided in the following table:
- What is the break-even quantity at which the company will be indifferent between the two options?
- If the annual demand for the new product is estimated at 1000 units, should the company make or buy the product?
- For what range of demand volume it will be better to make the product in-house?
- Q BEP = FC / ( v b – v m ) = 160,000 / (150 – 100) = 3200
- Total cost of “make” = 1000 x 100 + 160,000 = $260,000; Total cost of “buy” = 1000 x 150 = $150,000 Thus, it will be better to buy since it will be less costly in total.
- It will always be better to use the option with the lower variable cost for quantities greater than the break-even quantity. This can also be proven as follows:
We want “make” to be better than “buy” in this part of the question. Thus, for any quantity Q , we need to have:
Total cost of “make” < Total cost of “buy” = 160,000 + 100 Q < 150 Q = 160,000 < 50 Q = 3200 < Q
Finding a break-even point between two make decisions
Question: For what quantities would machine A be preferred to machine B? For quantities larger that the break-even quantity or for smaller ones?
If we assume the two options for making a product are machine A, with a fixed cost of FC A and a variable cost of v A , and machine B, with a fixed cost of FC B and a variable cost of v B , we have:
total cost of A = total cost of B = Q x v A + FC A = Q x V B + FC B = FC A – FC B = Q x V B – Q x V A = Q = ( FC A – FC B ) / ( V B – V A )
In any problem, it is suggested that you write down the total cost of each option and simplify from there to make sure that you do not miss any possible additional cost factors (if any).
The ABX Company has developed a new product and is going to make this product in-house. To be able to do this, they need to get a new equipment to be able to do the special type of processing required by the new product design. They have found two suppliers that sell such equipment. They are wondering which supplier they go ahead with. The costs associated with each option are provide in the following table:
- If the annual demand for the new product is estimated at 1000 units, which supplier should the company use?
- For what range of demand volume each supplier will be better?
- Q BEP = ( FC B – FC A ) / ( v A – v B ) = (200,000 – 160,000) / (150 – 100) = 40,000/50 = 800
- Total cost of Supplier A = 1000 x 150 + 160,000 = $310,000; Total cost of Supplier B = 1000 x 100 + 200,000 = $300,000 Thus, it will be better to go with Supplier B, since it will be less costly in total.
Let’s see for what quantities Supplier B will be better than Supplier A. In that case, for the quantity Q, we need to have:
Total cost of Supplier B < Total cost of Supplier A = 200,000 + 100 Q < 160,000 + 150 Q = 40,000 < 50 Q = 800 < Q
This means that for quantities above 800 units, Supplier B will be cheaper in total. Thus, for quantities less than 800, Supplier A will be cheaper in total.
- Saylor Academy. (2019). Strategic Capacity Planning in Operations Management. Retrieved on November 4, 2019, from https://learn.saylor.org/mod/page/view.php?id=9282 ↵
Introduction to Operations Management by Mary Drane and Hamid Faramarzi is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License , except where otherwise noted.
Getting Started With Capacity Planning in Operations Management
February 03, 2022 | by Lauren Remes
Capacity planning in operations management is the process of balancing demand for a good or service with the ability of a manufacturer or organization to produce enough to meet demand.
Planning for supply and demand effectively is the basis of effective operational management and can increase delivery capacity, bring to light inefficiencies and mitigate risk. Ultimately, understanding and effectively managing capacity can mean the difference between a profitable business and one that is out of business.
In manufacturing, capacity planning in operations management involves understanding how many items can be produced in a given period based on materials and equipment available. Take a bakery, for example. Understanding how many pies can be made and baked in a given day using existing equipment and staff (capacity) allows the bakery to plan for how many pies they can sell and what they need for resources (staff, apples, etc.).
For project-based organizations that don’t have equipment, just people, capacity planning involves understanding the scope and timing of all current and planned work and the availability and skill-sets of the people who will do the work.
The goal of capacity planning in operations management is better and more efficient operations
Services organizations and their project teams have a true challenge: trying to optimize their project staffing and resource management to generate as many billable hours as possible while avoiding burning out employees, delaying project delivery or missing revenue targets. Operating a services organization requires this balancing act take place on an ongoing basis, and means that capacity planning in operations management be done in several ways to truly achieve operational efficiency.
The 4 Types of Capacity Planning in Operations Management
There are several types of capacity planning in operations management that can inform your overall strategies. Four capacity planning types include:
- Resource capacity planning is the lifeblood of a services firm’s visibility into what work can be sold and delivered. Resource capacity at a high level is simply a calculation of number of employees multiplied by expected billable hours available in a given week. For most organizations, there has to be at least a few more considerations for optimal resource capacity planning, things like skill sets, utilization targets and work under management and in the sales pipeline create a complete understanding.
- Project capacity planning , by contrast, takes a view of a given project within an organization and the time and resources it needs. Project managers estimate the amount of time their assigned team can work in a given timeframe to balance workloads against project delivery milestones. Project capacity planning strategies need to be balanced with strong resource management, ensuring staff aren’t overworked (leading to burnout) or underworked (leading to lower profits).
- Team capacity planning is useful for groups that typically operate or work together. IT teams with specialized skills, for example, may perform work together on one or more projects. Project managers will use team capacity planning to understand how much work can get done from week to week and how those efforts will affect the project timeline.
- HR capacity planning is similar to resource planning but conducted by an HR group who may take into consideration other factors around professional development, ability to hire and onboard new staff and budget for new hires when determining capacity.
Capacity Planning Process
The most effective capacity planning process starts with these steps:
- Understand current capacity. What projects, using what people do we currently have under management? What extra time do people have to do more work?
- Project future demand. What projects are in our sales pipeline, how certain are they to close and when will they start. What skills will be required for those projects?
- Identify where additional capacity could come from. Can we work extra hours, develop new skills? Should we hire more people?
- Assess your risks. Will people burn out if we load in more work? What happens if we don’t meet demand? Calculate and quantify the risk of lower customer satisfaction if a project can’t start on time, or the cost of hiring and retraining employees if people quit. And don’t forget the lost opportunity costs associated with not having capacity to sell your services when demand is high.
Navigating Staffing Shortages With Smarter Capacity Planning
While the upsides to effective capacity planning in operations management include the ability to take on more projects, avoiding employee burnout and better customer service in a tight labor market it can make or break a company.
Considering that trends in staffing continue to point to fewer skilled workers available and increasing demand for their services, it is critical that companies are proactive about understanding their upcoming labor needs. Visibility into capacity translates to more time to plan for spending wisely, whether that means upskilling current staff and/or hiring contractors or full-time employees.
Capacity Planning Tools and How to Get Started
The proper capacity planning tools required depend on the size and maturity of your organization. Smaller organizations will likely get by with time reports, project plans and CRM data to understand when they can take on more work and or staff.
As your company grows, however, the need to become more operationally efficient rises and data management and processes become more important. Capacity planning software is necessary to manage more complex forecasting that relies on many data sets throughout the organization. That’s when most firms turn to a PSA tool.
PSA software provides visibility into continual long-term, medium-term and short-term capacity planning in operations management. This functionality allows for operational agility and optimized staffing and utilization.
This type of capacity planning software is used to create a roadmap for everyone in the organization, from project managers to resource managers to high-level executives. The right PSA for your organization will be the one that allows you to scale your business efficiently, taking advantage of demand while controlling for operational costs.
Where to Get Help With Capacity Planning in Operations Management
Ready to get more help for your capacity planning? Consider downloading our white paper, Capacity Planning for Scalable Growth . Or read our post on resource capacity planning for better customer service . And as always, reach out at any time if you’d like to see a demo of BigTime Software, the leading PSA software used by customers worldwide to scale and grow their services business.
Frequently Asked Questions About Capacity Planning in Operations Management
What is capacity planning for operations management.
Capacity planning in operations management is the process of balancing demand for a good or service with the ability of a manufacturer or organization to produce enough to meet demand.
What is capacity planning for professional services?
For project-based or professional services organizations, capacity planning, or service capacity planning, involves understanding the scope and timing of all current and planned work and the availability and skill-sets of the people who will do the work.
What are the four steps of capacity planning?
The four steps for capacity planning are:
1. Understand current capacity. 2. Project future demand. 3. Identify where additional capacity could come from. 4. Assess your risks.
Why is capacity planning important in operations management?
The goal of effective capacity planning in operations management is improved and more efficient business operations. Capacity planning allows businesses to optimize project staffing and resource management to generate as many billable hours as possible while avoiding burning out employees, delaying project delivery or missing revenue targets.
What are types of capacity planning in operations management?
Four capacity planning types include:
1. Resource capacity planning – Resource capacity planning at a high level is simply a calculation of number of employees multiplied by expected billable hours available in a given week. 2. Project capacity planning – Project managers estimate the amount of time their assigned team can work in a given timeframe to balance workloads against project delivery milestones. 3. Team capacity planning – This type is useful for groups that typically operate or work together. Tracking and forecasting at a team level is useful for project managers to take a “whole person” look at the group. 4. HR capacity planning – This is similar to resource planning but conducted by an HR group who may take into consideration other factors around professional development, ability to hire and onboard new staff and budget for new hires when determining capacity.
What are capacity planning tools?
The proper tools for capacity planning in operations management depend on the size and maturity of your organization. Smaller organizations will likely get by with time reports, project plans and CRM data to understand when they can take on more work and or staff. As a company grows, however, capacity planning software is necessary to manage more complex forecasting that relies on many data sets throughout the organization. That’s when most firms turn to PSA software.
What is resource capacity planning?
Resource capacity planning provides services firms with visibility into the amount of work that can be sold and delivered to meet customer demand. Resource capacity at a high level is simply a calculation of number of employees multiplied by expected billable hours available in a given week.
What is capacity planning process?
Capacity planning is the process of balancing demand for professional services with the resources and skills necessary to meet customer demand.
What is capacity in operations management?
The term capacity in operations management refers to the highest level of goods or services that a company can produce to meet demand.
What is project capacity planning?
Project capacity planning is the process of project managers estimating the amount of time their assigned team can work in a given timeframe to balance workloads against project delivery milestones.
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Operations Management Basics: Capacity, bottleneck, process capacity, flow rate and utilization
In order to perform the following calculations, processing time has to be defined as the time that is spent on a certain task (e.g. one station in a sandwich restaurant). We will also need the previously introduced definitions of flow rate and flow time.
Capacity : The capacity can be calculated for every station in a business process. It is always m / processing time with m being the number of resources (e.g. workers) being devoted to the station. If, for example, one worker needs 40 seconds to put together a sandwich, the capacity of this station is 1/40 per second or 1,5 sandwiches per minute. If there are two workers on the same station, the capacity increases to 2/40 per second or 3 sandwiches per minute.
Bottleneck : The bottleneck is defined as the process step (station) in the flow diagram with the lowest capacity (the “weakest link”). Although the bottleneck is often the process step with the longest processing time, it is important to always look at the capacities for making a judgement.
Process capacity : The process capacity is always equivalent to the capacity of the bottleneck. It is useful, to calculate a comprehensible number, such as customers per hour or parts per day (instead of a hard to comprehend number such as 1/40 customer per second or 1/345 part per second).
Flow rate : Even though the flow rate was previously defined , the definition needs to be augmented as the flow rate being the minimum of demand and process capacity. While the flow rate logically can never be higher than the capacity of the bottleneck, it can very well be lower, if the demand is insufficient.
Utilization : The utilization tells us, how well a resource is being used. It is calculated as flow rate divided by capacity (e.g. 1/40 / 1/25). The utilization always lies between 0% and 100%.
These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org .
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What Is Capacity Planning In Operations Management?
Capacity planning is a process that helps operations managers determine the capacity of their resources and plan for future growth. Businesses can avoid capacity issues and ensure smooth operations by estimating future demand and providing enough capacity to meet that demand. In this blog post, we will discuss what capacity planning operations management is and how it can benefit your business!
What Is Capacity Planning in Operations Management?
Operations management is the process of planning, organising, and controlling the resources needed to produce goods and services. Capacity planning is a vital part of operations management that determines how much capacity is required in order to meet future demand.
It further strengthens the company’s operations by ensuring that there is the capacity for future growth. Additionally, it also allows the firm to avoid overcapacity and the associated costs, such as idle resources and underutilised capacity. There are various capacity planning operations management methods, but they all aim to answer the same question: what is the right amount of power needed to meet future demand?
The capacity planning process begins with forecasting future demand. Once the forecast is complete, capacity can be planned based on the expected demand. The goal is to have enough capacity to meet customer demand without incurring high costs.
Depending on their products, services, and operations, different businesses will have additional capacity needs. Capacity planning is a vital part of operations management that should be tailored to the specific needs of each company.
When done correctly, capacity planning can help businesses avoid the costs of over- or under-capacity and ensure they have the resources required to meet future demand.
It is always better to start your professional journey on a resourceful note. That’s why we have brought an insightful certificate course that will make you adept in operations management. Check out our Advanced Certificate in Ops, SCM, and PM to know more.
Types of Capacity Planning In Operations Management
Capacity planning determines the production capacity needed by an organisation to meet changing demands for its products or services. The purpose of capacity planning is to ensure that the necessary resources are available when they are needed.
There are four types of capacity planning in operations management:
Resource Capacity Planning
Project capacity planning, team capacity planning, hr capacity planning.
Resource capacity planning determines the number of resources (e.g. machines, labour, materials) required to meet future demand. It is a crucial part of operations management as it ensures that the necessary resources are available when they are needed. With resource capacity planning, organisations can avoid over-utilisation or under-utilisation of resources, leading to inefficiencies and higher costs. Most organisations use capacity planning operations management to calculate future production capacity needs.
Benefits of Resources Capacity Planning:
Avoid over-utilisation or under-utilisation of resources: Capacity planning helps organisations avoid over-utilisation or under-utilisation of resources, leading to inefficiencies and higher costs.
Improve decision making: Capacity planning helps in creating a clear and concise understanding of production capacity needs. Organisations can invest in the right resources by understanding future capacity requirements and better using their existing resources.
Reduces production costs: Capacity planning assists in reducing production costs by ensuring that the necessary resources are available when they are needed. By avoiding over-utilisation or under-utilisation of resources, organisations can save on costs such as labour, materials, and energy.
Helps to meet future demand: Capacity planning helps to ensure that the necessary resources are available when they are needed. Organisations can invest in the right resources by understanding future capacity requirements and better using their existing resources.
Project capacity planning is determining the amount of work a team can complete within a specific time frame. This process includes estimating the number and type of resources required and the amount of time needed to complete the project.
Operations management capacity planning is the process of determining the amount of work that an organisation can complete within a specific time frame. This process includes estimating the number and type of resources required and the amount of time needed to complete the project.
With capacity planning, organisations can better understand the resources required to complete a project and plan for future projects accordingly. This process can also help identify potential bottlenecks and capacity constraints within the organisation.
Overall, capacity planning is a critical process in operations management that can help organisations optimise their resources and better plan for future projects.
Benefits of Project Capacity Planning
Improved resource utilisation: By understanding the resources required to complete a project, organisations can better utilise their resources and avoid over- or under-utilisation.
Increased efficiency: Capacity planning can help identify potential bottlenecks and capacity constraints within the organisation, leading to increased efficiency.
Better project planning: With capacity planning, organisations can better plan for future projects by understanding the resources and time required to complete the project.
Capacity planning is a great place to start if you’re looking to improve your operations management. This process can help you optimise resources and plan for future projects. Take a look at our Advanced Certificate in Ops, SCM, and PM to get a head start.
Team capacity planning is the process of matching your team’s capacity to the amount of work that needs to be done. This planning ensures that you have the right number of people with the right skills to work on different objectives.
Operations management capacity planning is a bit different. In operations capacity planning, you are trying to match the capacity of your resources to the demand for your product or service. This includes things like machines, materials, and labour. The goal is always looking for the right amount of capacity to meet customer demand without overproducing or underproducing.
There are a few different capacity planning methods, but they all have the same goal: to ensure you’re meeting customer demand without overspending on capacity. The most common forms are capacity utilisation, bottleneck analysis, and capacity planning tools.
Benefits of Team Capacity Planning
Improved communication between managers and employees: Capacity planning helps ensure everyone is on the same page regarding capacity. This can help to avoid miscommunication and misunderstanding.
Better utilisation of resources: Capacity planning can help ensure you’re using your resources in the most efficient way possible. It is beneficial to expedite your growth towards success.
More clarity on the work: Capacity planning can help to give you a clear picture of work to be done to meet customer demand. This can help you to prioritise and stay organised.
HR capacity planning is the process of forecasting future demand for human resources and designing a plan to meet that demand. HR capacity planning aims to ensure that an organisation has an adequate number of employees with the right skills to reach the business objectives.
Operations management capacity planning is critical, as it helps organisations avoid both understaffing and overstaffing. Understaffing can lead to decreased productivity and quality while overstaffing can lead to increased costs.
The first step in HR capacity planning is forecasting future human resource demand. It can be done using different methods, including trend analysis, market research, and customer surveys. Once the future demand has been forecasted, the next step is to design a plan to meet that demand.
The plan should consider the number of employees needed, the skills they will need to possess, and the locations they will need to be in. The goal is to have the right number of employees with the right skills in the right place at the right time.
Benefits of HR Capacity Planning:
- Helps organizations avoid understaffing and overstaffing: As mentioned above, capacity planning helps organizations avoid the negative consequences of both understaffing and overstaffing.
- Increases productivity and quality: By ensuring that the right number of employees with the right skills are in the right place at the right time, capacity planning can help increase productivity and quality.
- Decreases costs: By avoiding the need to hire and train new employees, capacity planning can help decrease costs.
- Ensures the right workforce: By forecasting future demand and designing a plan to meet that demand, capacity planning can help ensure that an organization has the right workforce.
Capacity Planning Process
Operations managers use capacity planning to forecast future demand for a company’s products or services and ensure the necessary resources are available when demand increases.
Step One: Determine Current Capacity
The first step is to determine the current capacity of the company’s resources. It is about determining how much output the company can currently produce with its existing resources. Current capacity will be affected by factors such as the number of employees, available space, and the type of equipment being used.
Step Two: Forecast Future Demand
The second step is forecasting future demand for the company’s products or services. This includes estimating how much demand will increase in the future and what new products or services the company will need to meet this demand.
Step Three: Identify Gaps in Capacity
The third step is to identify any gaps in capacity. It is about identifying any areas where the company’s resources will be unable to meet future demand. The gaps may be due to a lack of employees, space, or equipment. With capacity planning, operations managers can identify these gaps and take steps to address them.
Step Four: Develop a Plan to Fill the Gaps
The fourth step is to develop a plan to fill the gaps in capacity. It involves hiring new employees, renting additional space, or purchasing new equipment. By creating a plan to address the capacity needs of the company, operations managers can ensure that the company is prepared for future demand.
Step Five: Implement the Plan
The final step is to implement the capacity planning process. It puts the plan into action and ensures all the necessary resources are in place. By following the capacity planning process, operations managers can ensure that their company is prepared for future growth.
How Does Capacity Planning Help in Operations Management?
Capacity planning operations management is a crucial part of operations management . It ensures that an organisation has the necessary resources to meet its demand. By understanding the capacity of both the organisation and its resources, capacity planning can help avoid problems such as overproduction or underutilisation of resources.
There are two main types of capacity planning: strategic and tactical. Strategic capacity planning is long-term and looks at an organisation’s overall direction and goals. Tactical capacity planning is shorter-term and looks at how to best use an organisation’s resources.
Both types of capacity planning are essential for ensuring that an organisation’s resources are best used to meet its goals. Capacity planning can help avoid problems such as overproduction or underutilisation of resources.
When planning capacity, it is essential to consider the organisation’s short-term and long-term needs. By considering the big picture and the specifics, capacity planning can help ensure that an organisation possesses all the resources to meet its goals.
The absence of capacity planning can lead to a number of problems, such as:
- Overproduction: This occurs when capacity exceeds demand. This can lead to wasted resources and excess inventory.
- Underutilization: It is a situation where capacity is less than demand leading to lost sales and unhappy customers.
- Poor utilization: This occurs when capacity is not used efficiently leading to wasted resources and inefficient operations.
The Bottom Line
Operations capacity planning is the process of determining the number of resources required to meet future demand. It is a vital part of ensuring that an organisation can meet its goals and objectives. By understanding capacity requirements, organisations can better utilise their resources and avoid problems associated with over or under capacity.
Want a career in operations management but not sure where to start? Check out our operations management programs and courses. We offer the comprehensive education you need to start your operations management career. Take a look at the Advanced Certificate in Ops, SCM, and PM to discover more.
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Capacity Planning Guide: Everything You Need to Know
Our capacity planning guide will help you make sure your organization is properly managing teams and resources to increase overall efficiency.
Introduction
Capacity planning can be challenging for organizations of any size. It requires a delicate balance between real-time employee availability, available dollars in the budget, and the demand for work from customers, partners, or other stakeholders.
To help you overcome those challenges, we’ve created this extensive capacity planning guide. Use it as a reference to help you better understand how to manage employee capacity, allocate employee resources, and — most importantly — maximize profitability.
Capacity Planning Guide
What is capacity planning, capacity planning.
Capacity planning is the process through which organizations see how much work they can complete given their total number of employees and upcoming time constraints.
More specifically, “capacity” is the maximum amount of work that can be completed in a given period. Capacity is often measured in hours available to be worked by employees. And in this context, “planning” is the act of scheduling employee hours against a fixed or expected amount of work.
- A company has 10 employees.
- Each employee works 40 hours per week.
- 40 x 10 = 400 hours
The company has 400 hours of weekly capacity.
Without factoring in overtime, this company could handle a maximum of 400 hours of business each week.
Types of Capacity Planning
When considering capacity, this guide will focus specifically on workforce capacity planning. However, there are a few other types of capacity that could impact your organization’s overall capacity planning process. We’ll define each of them below.
Workforce Capacity Planning
As discussed above, workforce capacity planning takes your available employee hours into account. When you compare your available hours to your total workload — also referred to in this guide as “project demand” — you can make informed decisions about:
If you don’t have enough available hours to complete your existing workload, you’ll need to hire more people (or require and pay overtime to your existing employees).
Availability
If you end up with a capacity surplus, you’ll know your staff has available hours to work on more projects or increase skills with training.
Potential for burnout
If you see your staff is working at or above full capacity, you can make organizational and culture changes to improve morale and decrease turnover.
Depending on the depth of your capacity planning process, you might also be able to make a catalogue of your employees’ skill sets to more effectively assign them to projects and plan around in-demand skills.
Most of your employees, for example, could probably complete data entry on a project. However, it would be better to assign your less expensive and experienced intern to a data entry task than a more costly executive or highly skilled programmer whose skills are needed elsewhere.
Production capacity
Put simply, production capacity refers to a machine’s ability to create widgets. On an assembly line in a car factory, for example, a painting robot might be able to paint 10,000 cars in a day. Considering this type of capacity is also important for workforce capacity planning; the workers on the assembly line are limited by the number of cars or parts a machine can process during a shift.
However, we largely mention production capacity to point out that your workforce isn’t composed of machines. While production capacity is fairly consistent for a machine, people have off days. They’ll get pulled into meetings and need time to refocus on their tasks. They get sick and need to take unexpected days off. They have off days where they won’t be able to complete as much work as they usually do.
In short, you can easily and reliably calculate production capacity. Barring any major malfunctions, you can count on machines to do the amount of work you assign to them. However, workforce capacity planning requires choosing from several different strategies to better predict your organization’s capacity.
What are the Different Capacity Planning Strategies?
Matching involves monitoring the market for demand increases and decreases on a regular basis. Capacity is then changed to match demand.
Matching capacity is considered to be a moderate strategy that requires near-constant, incremental adjustments. It can require a considerable amount of work, but it is a low-risk strategy that is ideal for many organizations.
As its name suggests, the lag strategy involves waiting until there is true demand before adding additional capacity. Lag is the most conservative strategy, as hiring is only initiated when demand is at 100%.
This method virtually ensures the lowest possible staffing costs. However, it can lead to the loss of potential customers if there is not enough talent on hand to deliver products or services.
Lead capacity planning is the most radical of the capacity planning strategies, as it involves changing capacity in anticipation of market demand. Hiring can be a slow process, and lead capacity planning allows organizations to prepare for growing or rapidly evolving markets.
When demand increases, businesses that successfully deploy lead capacity planning will be ready to meet client needs. However, incorrect or off-base assumptions can result in overstaffed teams and have a significant negative impact on the bottom line.
The adjustment strategy involves using your organization’s historical data to anticipate changes in your capacity needs.
If you run a nonprofit whose main mission is to run summer programs for underserved kids, your demand will increase greatly outside of the school year. Looking at your historical data, you can see when you need to start hiring more people to manage and staff those programs. You can also have a better idea of how much you need to downscale when the summer ends without letting too many people go.
The adjustment strategy requires logging and being able to access that historical data. Tools like timesheet software or applicant tracking systems can provide the types of data you need to understand how your capacity fluctuates throughout the year.
Why Should I Use Capacity Planning?
With all the different factors to take into account, you might be wondering what your organization will get out of capacity planning in the long run. While understanding capacity involves a decent amount of effort on your part, the good news is that it also provides multiple benefits for your organization.
The Benefits of Capacity Planning
Overall, you’ll be able to create better long-term strategies for your organization and get a better sense of how your organization operates on a daily basis. Below are just a few of the gains you can expect from capacity planning:
- Make data-informed decisions about your staff and projects.
- Create better budgets.
- Eliminate burnout.
- Understand your staff’s skill set.
- Hire more intelligently.
- Make time for training and upskilling.
You can learn more about these benefits in our in-depth blog post, 6 Benefits of Capacity Planning for Any Organization .
What are the Goals of Capacity Planning?
The ultimate goal of capacity planning is to understand whether you have enough staff on hand to complete your current projects.
When you combine capacity planning with resource planning (discussed below), you can allocate work efficiently according to deadlines, project budgets, available hours, and billing rates. The idea is, when you understand your workload and your employees’ overall capacity, you can better assign them to the projects that need to get done.
What’s the Difference Between Capacity Planning and Resource Planning?
You can think of capacity planning as the foundation or first step of resource planning.
Capacity planning lets you know if your supply (available employee hours) can meet your demand (the number of hours it will take to complete your projects). Resource planning takes that information one step further and allows you to assign your employees to individual projects in an efficient way.
Good capacity planning is critical because it shows you the basics: whether you can even finish your projects on time with the staff you have. Resource planning relies on that data to help you map out how you can assign your staff to projects while also considering available hours, project budgets, and billing rates.
What is the Capacity Planning Process?
Now that you understand what capacity planning is, how it can benefit your organization, and what its goals are, how do you do it? We’ve outlined the basics of the capacity planning process below.
First, you have to understand how much capacity you have and how that compares to your project workload.
A tip: If you want to avoid doing this math manually, our capacity planning template can crunch all these numbers for you.
How to calculate capacity Calculate how many total hours you will need to work on projects per week. Multiply the number of employees you have by the number of hours they work per week. (Most full-time employees in the U.S. will work for 40 hours per week.) Calculate your utilization rate (the number of hours in a week an employee will actually spend working on projects) to create some buffer room for non-project work and unexpected delays. Our template defaults to a utilization rate of 80%, meaning a full-time employee will spend only 32 hours per week on project work. Compare your project demand with your potential work capacity.
The Math in Action:
I have five projects, each requiring 100 hours per week.
- 5 x 100 = 500
- So my total project demand is 500 hours per week
I have 15 employees working 40 hours per week at a utilization rate of 80%.
- 15 x 40 x 0.8 = 480
- So my potential work capacity is 480 hours per week.
- 500 hours – 480 hours = 20 hours
I still have 20 hours of project work per week that needs to get done.
After you’ve calculated your capacity, you can make appropriate decisions based on the numbers you’re seeing.
In our example above, I still have 20 hours of project work that needs to get done and not enough staff to currently cover it. So I should either hire a new employee or contractor to complete that work or plan on burning out my staff to finish everything by its deadline.
If you’re just getting started with capacity planning, you’re likely relying on estimates, especially when it comes to project demand. To understand how much time your projects actually take up, you should start tracking employee time .
Requiring employees to track time at the project level will help you see where your employees spend their time each day. It will also help you identify bottlenecks. For example, one project might include tedious but time-consuming tasks that run up your budgets but don’t contribute a lot of overall value. You can either shift that work to employees with lower billing rates or use your timesheet data to show your client that they need to increase their budget if they want to keep working with you.
With time tracking data, you can make better, more accurate capacity plans in the future.
What Are Some Good Capacity Planning Tools?
You can always use a spreadsheet to create a capacity plan that works for your organization. But if you want to create a plan that uses accurate, historical data or just puts everything in one place, there are several software tools that can help you with capacity planning.
Trello is a free project management tool that can give you a clear visual of how many projects your team is working on.
Who this tool is for : Teams and managers just getting started with project management who might like to do some basic capacity planning.
The free version of Trello can help you see at a glance if you’ve taken on too many projects or if someone on your team is overloaded with too much work. If you upgrade to a paid version of Trello, you can create and see more in-depth reports on capacity with due dates, project hour estimates, and calendar and Gantt views.
Trello offers a free forever plan, which includes basic features such as organizing projects on a board. However, if you want to use Trello for capacity planning, you might want to upgrade to its “Business Class” plan, which starts at $10 per user per month. This plan gives you access to different board views, reports, and metrics that will help you better manage your team’s capacity.
ResourceGuru
ResourceGuru is a resource management tool that includes capacity planning features.
Who this tool is for : Organizations whose employees work across many different projects or teams who need serious resource scheduling capabilities.
Using ResourceGuru, you can view your entire staff’s available hours and their skill sets to see who can work on which projects. You can also view time off and vacation days so you don’t accidentally overload someone when they should be taking a break from the office.
ResourceGuru offers a 30-day free trial and then starts at $2.50 per person, per month.
ClickTime uses the power of your team’s timesheet data to help you create accurate, real-time resource plans.
Who this tool is for : Organizations who crave accurate, real-time information about their team’s time and want to make capacity and resource plans based on that data.
Unlike the other tools we’ve mentioned, the foundation of ClickTime is your team’s time tracking data. When going through the process of resource planning, you can allocate project hours to your team members. The number of hours allocated will show up on individuals’ time entry dashboards, helping them to prioritize different projects or program work throughout the day.
When team members fill out their timesheets, their logged hours will appear in your Resource Planning Grid, shown above. You can easily see when someone has gone over their allotted hours and course correct immediately.
Access to ClickTime’s Resource Planning Tool starts at $24 per user per month. ClickTime is the only tool out of the three we’ve mentioned that includes time tracking and uses that data to help you create better resource and capacity plans in the future.
Some Capacity Planning Tips for You
So now you understand what capacity planning is, why you should do it, and which tools you can leverage to organize your process. But how do you actually do capacity planning well? Below are a few tips from experts to get you started.
Remember that your “resources” are people, not machines.
Stop thinking about a workday as eight hours of “real” work..
Even the most productive eight-hour day will include some non-billable tasks, such as clearing out your inbox. And even the most focused employees will get distracted every now and then.
Help your team grow by making time for training.
Don’t let capacity planning decrease your own capacity..
You can learn more about these tips in our in-depth blog post, Resource Capacity Planning Best Practices: Advice from Experts .
Start Your Capacity Planning Journey Today
If you’re ready for powerful, data-driven insights into your team’s workload, start your free trial of ClickTime. You’ll have access to timesheet data that shows you how much time your team spends on projects every day, helping you create more informed resource plans for your organization.
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Process Capacity
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The production system design planning considers input requirements, conversion process and output. After considering the forecast and long-term planning organization should undertake capacity planning.
Capacity is defined as the ability to achieve, store or produce. For an organization, capacity would be the ability of a given system to produce output within the specific time period . In operations, management capacity is referred as an amount of the input resources available to produce relative output over period of time.
In general, terms capacity is referred as maximum production capacity, which can be attained within a normal working schedule.
Capacity planning is essential to be determining optimum utilization of resource and plays an important role decision-making process, for example, extension of existing operations, modification to product lines, starting new products, etc.
Strategic Capacity Planning
A technique used to identify and measure overall capacity of production is referred to as strategic capacity planning. Strategic capacity planning is utilized for capital intensive resource like plant, machinery, labor, etc.
Strategic capacity planning is essential as it helps the organization in meeting the future requirements of the organization. Planning ensures that operating cost are maintained at a minimum possible level without affecting the quality. It ensures the organization remain competitive and can achieve the long-term growth plan.
Capacity Planning Classification
Capacity planning based on the timeline is classified into three main categories long range, medium range and short range.
Production capacity is the maximum output possible from equipment under normal working condition or day.
Sustainable capacity is the maximum production level achievable in realistic work condition and considering normal machine breakdown, maintenance, etc.
Effective capacity is the optimum production level under pre-defined job and work-schedules, normal machine breakdown, maintenance, etc.
Goal of Capacity Planning
The ultimate goal of capacity planning is to meet the current and future level of the requirement at a minimal wastage. The three types of capacity planning based on goal are lead capacity planning, lag strategy planning and match strategy planning.
Factors Affecting Capacity Planning
Effective capacity planning is dependent upon factors like production facility (layout, design, and location), product line or matrix, production technology, human capital (job design, compensation), operational structure (scheduling, quality assurance) and external structure ( policy, safety regulations)
Forecasting v/s Capacity Planning
There would be a scenario where capacity planning done on a basis of forecasting may not exactly match.
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It’s hard to plan how much capacity you’re going to have or need for a certain task, project, moment, or scenario in most areas of life. Many people adjust as they go, making room where they can.
While this is a somewhat unfortunate truth of life, it doesn’t have to be one in business. Though there’s no way to know for sure how much product to order in six months or how many workers you’ll need in a year, there is something that can get you as close to these answers as you can possibly be: capacity planning.
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What is Capacity Planning?
A capacity planning process involves determining how much production capacity is required to meet changing demand for products. Design capacity refers to an organization's maximum capacity to accomplish work over a given time period in capacity planning.
Capacity planning process is used by organizations to determine their production capacity in order to meet the changing needs of their products. A design capacity is an organization's maximum ability to complete a specified amount of work in a given time period, in the context of capacity planning.
Capacity planning is the act of balancing available resources to satisfy customer demand or project capacity needs. In project management and production, capacity refers to the amount of work that can get completed in a given amount of time.
The capacity planning process is crucial in project management knowledge areas such as:
- Resource management
- Time management
- Team management
- Work Management
Production capacity, strategy planning, and project planning go hand in hand. Planning is the task of scheduling the team members so that the work gets completed on time. Capacity management is not a set procedure. Because every company is distinct and demand keeps fluctuating, project managers can employ various capacity planning methodologies to respond to different conditions.
Capacity Planning Strategies
There are three capacity planning methodologies to assist you in meeting the demand, covering your resource needs, and boosting the productivity of your team members.
1. Lag Strategy
The lag method entails having sufficient resources to fulfill demand rather than planned demand estimations. This capacity planning technique is advantageous for smaller firms with limited capacity requirements.
2. Lead Strategy
The primary strategy entails having enough resources to satisfy demand estimates. The lead strategy planning technique is beneficial since your extra capacity can accommodate the rising demand.
3. Match Strategy
This technique combines the lead and lag capacity planning approaches. In this instance, project managers must monitor actual demand, demand planning estimates, and market developments to modify capacity.
Types of Capacity Planning
Capacity planning itself can be split into three types: workforce, product, and tool. Together they ensure that you have the right amount of three main resources for the short- and long-term.
Workforce Capacity Planning
This capacity planning strategy ensures that you have the workforce needed to meet demand. It’s all about having the right number of workers and hours available to not just complete jobs but complete them well. Should you need to hire more workers (or possibly downsize) you’ll know how far in advance you need to start making changes to accommodate the length of the recruiting and onboarding process.
Product Capacity Planning
This capacity strategy ensures that your business is equipped with the right number of products or resources needed to fulfill deliverables. For example, a pet store needs things like food, pet toys, and equipment like carriers, leashes, and cages. These are all things which are required to fulfill demand.
Tool Capacity Planning
Finally, this type of capacity planning strategy ensures that your business is equipped with the necessary tools. Such tools may include machinery, vehicles, assembly line parts, and anything else needed to create and deliver your product or service in a timely manner.
When is Capacity Planning Required?
Capacity planning is useful and required any time you’re trying to ensure that your supply meets demand. This means whether it's a week, month, quarter, year, or more, capacity planning is always a good idea and rule of thumb to stick to.
For many businesses, leaders and managers have a lot to handle. Among some of their responsibilities are:
- Keeping track of autonomous teams
- Being aware of changing priorities
- Preparing for unpredictable tasks
- Matrix structures
- Handling remote workers
- The space between actual work and planned work (i.e., the reality of the situation)
With so many moving parts, it doesn’t make sense to go forward without a plan. Having a capacity planning strategy is a great way to get ahead of the challenges that are sure to arise.
Capacity planning is a great way to invest your time because it helps you address possible future issues, take advantage of the benefits that come with planning, improve team performance , and streamline your business tasks for increased efficiency.
How Does Capacity Planning Help in Sprint Planning?
To keep things organized, many companies practice sprint planning . Sprint planning refers to organizing and assigning all tasks to the right team members in a certain period of time.
In many cases, sprint planning is dependent on each team member doing their part. This means that once a task is done, another team member can start their task, and so on. If one team member falls behind, it could derail the process to some degree, but this is where capacity planning comes in.
With capacity planning, sprint planning is made tighter, more efficient, and achievable. When you prepare for possibilities like missed deadlines, not having enough workers or product, or even bottlenecks in the supply chain, you’re better equipped to handle such issues should they come up.
In a way, capacity is like having a Plan A and a Plan B in one: you have your main course of action as well as several contingency plans should anything go wrong, become delayed, or need extra attention.
What is Capacity Planning in Operations Management?
Capacity planning is an integral aspect of operations management . It refers to the system of maintaining a balance between the demand-supply of goods and products. It involves evaluating all aspects of production, such as the machinery, the staff, and the work centers, to know if a specific organization or the manufacturer can meet the customers' current demand and in the future. The capacity management analytics market shows a favorable growth rate in the projected 2020 to 2027 , owing to the changing business environment and workload. This creates the demand for the coming of much higher technologies to evaluate growth. Capacity management analytics work by predicting the changes in the operations and independently balancing the workloads in real-time accordingly. Thus, it helps minimize performance problems in business operations and adds to overall productivity.
Knowing how fast your production system works with capacity planning becomes easier. You need to examine a project and the workforce to tell if the project is delivered as fast as possible. Most importantly, if you coordinate with your team, you may wonder if more options are available to do the work efficiently. In such situations, capacity planning helps you explore more options. Through capacity planning, you will know if the extra workforce handles one project or if fewer people handle a project .
Another benefit of capacity planning is that it not only helps you to know the present condition of your business but, at the same time, will let you know the future scenario of your business. Usually, business owners reduce the workforce according to the workload to avoid paying unnecessary wages, especially when fewer orders are coming from customers. One disadvantage of this hasty decision is that it might affect your business in the long run. Because you may find it challenging to handle the work with a smaller workforce when the workload increases.
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Types of Capacity Planning in Operations Management
The following types of capacity management planning will evaluate your overall strategies.
Resource Capacity Planning
Resource capacity planning helps you maximize the capacity of existing resources. It will help you choose which resources to be added and which are to be eliminated or downgraded. Mathematically it works by calculating the total number of employees and multiplying it by the weekly billable hours. Most organizations look for skill sets, utilization rates, management and sales pipeline work, etc., to better understand capacity planning.
Project Capacity Planning
It takes a closer look into the project at hand in an organization and the resources and time it requires to complete. Project managers are assigned for this purpose. They calculate the estimated time the assigned team will work on that project. This evaluation aims to balance the workload concerning the project delivery milestone points. This type of capacity planning works in coordination with sound resource management to ensure that your staff is well-rested, which could lead to extreme stress and burnout or underworked, which could also lead to fewer profits.
Team Capacity Planning
This is helpful for businesses that operate together. For example, a team works together in the IT sector on multiple projects. Here the project managers will check with the help of capacity planning how much work can be accomplished weekly and how such efforts will impact the project timeline.
HR Capacity Planning
This is like resource planning. However, it is conducted by a human resource manager who will examine various additional factors such as the ability to recruit, onboarding new staff, professional performance, and the estimated budget for new recruitment apart from evaluating capacity.
Capacity Planning Benefits
If you’re looking for the main benefit of capacity planning, there are actually quite a few! Businesses who adopt a capacity planning methodology to increase efficiency and meet demand may find themselves enjoying some or all of the following benefits:
Reduce Stock-Outs
Stock-outs occur when you fail to meet customer demand. It’s no secret that customers don’t like to wait, and you being “out” of a product or service will only push them onto the next business that can meet their demand. Thankfully, one benefit of capacity planning is that you can reduce stock-outs and even avoid them altogether. Throughout your planning process you’ll see how the market and demand fluctuate, making you better able to predict supply and demand changes.
Identify Inefficiencies in Your Business Process
Another benefit of capacity planning is knowing your minimum and maximum capacity of resources. Whatever you’re looking at (be it product, people, equipment, or resources), you’ll know what factors may limit capacity and how to avoid them to ensure you always have what you need.
Increase Delivery Capacity
Today’s customers want their products immediately. Quick turnaround times for deliveries can spell success for a business, while slower delivery times can lose business. Capacity planning is a great way to gauge your delivery capacity so that you know you have the workers available to deliver your products as soon as they’re purchased, making you a contender among the market competition.
Confirm Availability
Another notable benefit of capacity planning is ensuring future availability. Before you sign a new contract or send another proposal to a potential client, capacity planning helps you know for sure that you have the workforce and resources needed to take care of your new customers, projects, and more.
Capacity Planning vs. Resource Planning
While "capacity planning" and "resource planning" are sometimes used interchangeably, they are not synonymous. We've listed the distinctions below to help you comprehend them.
Capacity Planning
- It is a strategic planning procedure meant to assist you in determining whether your business has the necessary production capacity to satisfy demand.
- It considers the availability of resources at the skill set/team level.
- It helps the decision-making process for hiring resources or deferring/approving/canceling initiatives.
- Capacity planning is concerned with supply and demand.
Resource Planning
- It is a strategic planning procedure that coordinates and assigns resources to project activities based on resource needs.
- It gives project managers a strategy for which resources to employ and when to use them for their projects.
- Resource planning is concerned with resource allocation.
Capacity Planning vs. Capacity Requirements Planning
The stage preceding capacity planning is capacity requirements planning. It is the process through which an organization determines how much it needs to produce and if it has the production capacity to do so.
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Capacity Planning Best Practices
Here are some pointers and best practices for capacity planning to assist you with your resources and teams.
- Form a Cross-Functional Team: A cross-functional team with varied levels and roles is required to cooperate and communicate regarding production capacity and resource management.
- Determine Resource Capacity: Before you develop a production capacity plan, you must first determine your present capacity and available resources.
- Determine the Resources Needed: Examine the scope of each project and the resources necessary to complete the project's task.
- Project Prioritization: Which projects are most vital, and which can go on hold for the time being? You can't do it all at once.
- Allocate Resources Based on Project Priority: Now, allocate those priority projects and ensure they are in sync with the organization's goals.
- Maintain Open Lines of Communication: Communicate with executives, project management leaders, and stakeholders.
- Document Known Risks: Keep an eye out for risks like union strikes, bad weather, and government laws that might put a project on hold or introduce new ones unexpectedly.
- Plan for Dealing with Excess Capacity: Understand where it is, how to handle it (for example, reassignment), or insufficient capacity (again, where/how).
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7 Strategic Capacity Planning ; Efficiency = (Actual Output / Effective Capacity) x 100% ; Utilization = (Actual Output / Design Capacity) x 100% ; Effective
Capacity is calculated as (number of machines or workers) × (number of shifts) × (utilization) × (efficiency).
Resource capacity planning is the lifeblood of a services firm's visibility into what work can be sold and delivered. Resource capacity at a
Capacity: The capacity can be calculated for every station in a business process. It is always m / processing time with m being the number of
Capacity planning is a process that helps operations managers determine the capacity of their resources and plan for future growth.
Capacity planning is the process through which organizations see how much work they can complete given their total number of employees and upcoming time
They are calculated by means of the following formula: · Human capacity = actual working hours x attendance rate x direct labor rate x equivalent manpower.
For an organization, capacity would be the ability of a given system to produce output within the specific time period. In operations, management capacity is
Capacity planning is an integral aspect of operations management. It refers to the system of maintaining a balance between the demand-supply of
There are three steps in capacity planning: 1. Calculate the available capacity given all production inputs and their respective constraints. 2.