Capacity planning

Last updated September 15, 2024

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products.^[1] In the context of capacity planning, design capacity is the maximum amount of work that an organization or individual is capable of completing in a given period. Effective capacity is the maximum amount of work that an organization or individual is capable of completing in a given period due to constraints such as quality problems, delays, material handling, etc.

The phrase is also used in business computing and information technology as a synonym for capacity management. IT capacity planning involves estimating the storage, computer hardware, software and connection infrastructure resources required over some future period of time. A common concern of enterprises is whether the required resources are in place to handle an increase in users or number of interactions.^[2] Capacity management is concerned about adding central processing units (CPUs), memory and storage to a physical or virtual server. This has been the traditional and vertical way of scaling up web applications, however IT capacity planning has been developed with the goal of forecasting the requirements for this vertical scaling approach.^[3]

A discrepancy between the capacity of an organization and the demands of its customers results in inefficiency, either in under-utilized resources or unfulfilled customer demand. The goal of capacity planning is to minimize this discrepancy. Demand for an organization's capacity varies based on changes in production output, such as increasing or decreasing the production quantity of an existing product, or producing new products. Better utilization of existing capacity can be accomplished through improvements in overall equipment effectiveness (OEE). Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities.

Capacity is calculated as (number of machines or workers) × (number of shifts) × (utilization) × (efficiency).

Assets

There are three primary categories of assets that concern capacity planning:

People - Ensuring enough and sufficiently trained personnel to support business operations.
Technology - Determining and acquiring hardware, software, and networking resources to achieve optimal performance, minimal bottleneck, and high availability.
Infrastructure - Ensuring physical facilities meet the needs of the business environment.

They must all account both for current capacity as well as possible future scaling.

Strategies

The broad classes of capacity planning are lead strategy, lag strategy, match strategy, and adjustment strategy.

Lead strategy is adding capacity according to the increasing demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors by improving the service level and reducing lead time. It is also a strategy aimed at reducing stockout costs. A large capacity does not necessarily imply high inventory levels, but it can imply higher cycle stock costs. Excess capacity can also be rented to other companies.

Advantage of lead strategy: First, it ensures that the organization has adequate capacity to meet all demand, even during periods of high growth. This is especially important when the availability of a product or service is crucial, as in the case of emergency care or hot new product. For many new products, being late to market can mean the difference between success and failure. Another advantage of a lead capacity strategy is that it can be used to preempt competitors who might be planning to expand their own capacity. Being the first in an area to open a large grocery or home improvement store gives a retailer a define edge. Finally many businesses find that overbuilding in anticipation of increased usage is cheaper and less disruptive than constantly making small increases in capacity. Of course, a lead capacity strategy can be very risky, particularly if demand is unpredictable or technology is evolving rapidly.

Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand (North Carolina State University, 2006). This is a more conservative strategy and opposite of a lead capacity strategy. It decreases the risk of waste, but it may result in the loss of possible customers either by stockout or low service levels. Three clear advantages of this strategy are a reduced risk of overbuilding, greater productivity due to higher utilization levels, and the ability to put off large investments as long as possible. Organization that follow this strategy often provide mature, cost-sensitive products or services.
Match strategy is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.
Adjustment strategy is adding or reducing capacity in small or large amounts due to consumer's demand, or, due to major changes to product or system architecture.

Time-scale

One simple model distinguishes between short-, mid-, and long-term capacity planning (operational, tactical, and strategical, respectively). These range from a few days to many years in the future.^[4]

Measurement

In the context of systems engineering, capacity planning^[5] is used during system design and system performance monitoring....

Capacity planning is long-term decision that establishes a firm's overall level resources. It extends over a time horizon long enough to obtain resources. Capacity decisions affect the production lead time, customer responsiveness, operating cost and company ability to compete. Inadequate capacity planning can lead to the loss of the customer and business. Excess capacity can drain the company's resources and prevent investments into more lucrative ventures. The question of when capacity should be increased and by how much are the critical decisions. Failure to make these decisions correctly can be especially damaging to the overall performance when time delays are present in the system.^[6]

Capacity – available or required?

From a scheduling perspective it is very easy to determine how much capacity (or time) will be required to manufacture a quantity of parts. Simply multiply the standard cycle time by the number of parts and divide by the part or process OEE %.

If production is scheduled to produce 500 pieces of product A on a machine having a cycle time of 30 seconds and the OEE for the process is 85%, then the time to produce the parts would be calculated as follows:

(500 parts × 30 seconds) / 85% = 17647.1 seconds The OEE index makes it easy to determine whether we have ample capacity to run the required production. In this example 4.2 hours at standard versus 4.9 hours based on the OEE index.

By repeating this process for all the parts that run through a given machine, it is possible to determine the total capacity required to run production.

Capacity available

When considering new work for a piece of equipment or machinery, knowing how much capacity is available to run the work will eventually become part of the overall process. Typically, an annual forecast is used to determine how many hours per year are required. To calculate the total capacity available, the volume is adjusted according to the period being considered. The available capacity is the difference between the required capacity and planned operating capacity.

Capacity is needed in formulation and execution of strategy as this refers to how capable are the resources in the organization. Without effective resources it could be very difficult to formulate and implement the Strategy.

Related Research Articles

In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.

Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.

A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods in distribution channels within the supply chain in the most efficient manner.

In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessment of the internal and external environments in which the organization operates. Strategic management provides overall direction to an enterprise and involves specifying the organization's objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans. Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision-making in the context of complex environments and competitive dynamics. Strategic management is not static in nature; the models can include a feedback loop to monitor execution and to inform the next round of planning.

A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity in which it engages. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most.

<span class="mw-page-title-main">Manufacturing resource planning</span> Defined as a method for the effective planning of all resources of a manufacturing company

Manufacturingresource planning is a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what-if" questions and is an extension of closed-loop MRP.

<span class="mw-page-title-main">Operations management</span> In business operations, controlling the process of production of goods

Operations management is concerned with designing and controlling the production of goods and services, ensuring that businesses are efficient in using resources to meet customer requirements.

Quality, cost, delivery (QCD), sometimes expanded to quality, cost, delivery, morale, safety (QCDMS), is a management approach originally developed by the British automotive industry. QCD assess different components of the production process and provides feedback in the form of facts and figures that help managers make logical decisions. By using the gathered data, it is easier for organizations to prioritize their future goals. QCD helps break down processes to organize and prioritize efforts before they grow overwhelming.

Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.

Demand-chain management (DCM) is the management of relationships between suppliers and customers to deliver the best value to the customer at the least cost to the demand chain as a whole. Demand-chain management is similar to supply-chain management but with special regard to the customers.

Build to Order is a production approach where products are not built until a confirmed order for products is received. Thus, the end consumer determines the time and number of produced products. The ordered product is customized, meeting the design requirements of an individual, organization or business. Such production orders can be generated manually, or through inventory/production management programs. BTO is the oldest style of order fulfillment and is the most appropriate approach used for highly customized or low volume products. Industries with expensive inventory use this production approach. Moreover, "Made to order" products are common in the food service industry, such as at restaurants.

Revenue management is a discipline to maximize profit by optimizing rate (ADR) and occupancy (Occ). In its day to day application the maximization of RevPAR is paramount.

A master production schedule (MPS) is a plan for individual commodities to be produced in each time period such as production, staffing, inventory, etc. It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded. This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since a MPS drives much factory activity, its accuracy and viability dramatically affect profitability. Typical MPSs are created by software with user tweaking.

Quick response manufacturing (QRM) is an approach to manufacturing which emphasizes the beneficial effect of reducing internal and external lead times.

Manufacturing execution systems (MES) are computerized systems used in manufacturing to track and document the transformation of raw materials to finished goods. MES provides information that helps manufacturing decision-makers understand how current conditions on the plant floor can be optimized to improve production output. MES works as real-time monitoring system to enable the control of multiple elements of the production process.

Demand flow technology (DFT) is a strategy for defining and deploying business processes in a flow, driven in response to customer demand. DFT is based on a set of applied mathematical tools that are used to connect processes in a flow and link it to daily changes in demand. DFT represents a scientific approach to flow manufacturing for discrete production. It is built on principles of demand pull where customer demand is the central signal to guide factory and office activity in the daily operation. DFT is intended to provide an alternative to schedule-push manufacturing which primarily uses a sales plan and forecast to determine a production schedule.

In a business context, operational efficiency is a measurement of resource allocation and can be defined as the ratio between an output gained from the business and an input to run a business operation. When improving operational efficiency, the output to input ratio improves.

In production and project management, a bottleneck is a process in a chain of processes, such that its limited capacity reduces the capacity of the whole chain. The result of having a bottleneck are stalls in production, supply overstock, pressure from customers, and low employee morale. There are both short and long-term bottlenecks. Short-term bottlenecks are temporary and are not normally a significant problem. An example of a short-term bottleneck would be a skilled employee taking a few days off. Long-term bottlenecks occur all the time and can cumulatively significantly slow down production. An example of a long-term bottleneck is when a machine is not efficient enough and as a result has a long queue.

Production planning is the planning of production and manufacturing modules in a company or industry. It utilizes the resource allocation of activities of employees, materials and production capacity, in order to serve different customers.

References

↑ "Terms & Definitions - Supply Chain Management". North Carolina State University. 2006. Archived from the original on 2017-04-27. Retrieved 2008-10-26.
↑ Rouse, Margaret (April 2006), Building with modern data center design in mind, archived from the original on 3 March 2018, retrieved 23 September 2015
↑ Stamford, Conn (May 8, 2014), Gartner Says Major Organizations Will Need to Grow Capacity and Performance Management Skills That Are the Foundation of Web-Scale IT, archived from the original on May 12, 2014, retrieved 24 September 2015
↑ Lucija Bakić (10 Nov 2023). "What Is Capacity Planning? Definitive Guide to Top Business Strategies". Productive.
↑ Gunther, Neil J. (2007). Guerrilla Capacity Planning. Springer. ISBN 978-3-540-26138-4.
↑ Spicar, Radim (2014). "System Dynamics Archetypes in Capacity Planning". Procedia Engineering. 69 (C): 1350–1355. doi: 10.1016/j.proeng.2014.03.128 .

Bibliography

Hill, Joyce (2006). Capacity Requirements Planning.
Krajewski, Lee J.; Ritzman, Larry P. (2005). Operations Management: Processes and Value Chains. Upper Saddle River, New Jersey: Prentice Hall.
Lazowska, Edward D. (1984). Quantitative System Performance . Prentice-Hall. ISBN 978-0-13-746975-8.

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[NCSU-1] "Terms & Definitions - Supply Chain Management". North Carolina State University. 2006. Archived from the original on 2017-04-27. Retrieved 2008-10-26.

[Rouse-2] Rouse, Margaret (April 2006), Building with modern data center design in mind, archived from the original on 3 March 2018, retrieved 23 September 2015

[Stamford-3] Stamford, Conn (May 8, 2014), Gartner Says Major Organizations Will Need to Grow Capacity and Performance Management Skills That Are the Foundation of Web-Scale IT, archived from the original on May 12, 2014, retrieved 24 September 2015

[4] Lucija Bakić (10 Nov 2023). "What Is Capacity Planning? Definitive Guide to Top Business Strategies". Productive.

[capBk-5] Gunther, Neil J. (2007). Guerrilla Capacity Planning. Springer. ISBN 978-3-540-26138-4.

[SDACP-6] Spicar, Radim (2014). "System Dynamics Archetypes in Capacity Planning". Procedia Engineering. 69 (C): 1350–1355. doi: 10.1016/j.proeng.2014.03.128 .

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