What is Capacity Planning Strategy?
Capacity planning strategy involves the process used to determine the resources manufacturers need to meet the demand for their products or services. The level of capacity directly relates to the amount of output in the form of goods and services manufacturers can produce to satisfy customer demand.
The right capacity planning strategy can guide manufacturers on how much raw materials, equipment, labor, and investment in facilities need to be acquired over a period of time to meet the future demand over products. When there is a lack of capacity planning, customers’ needs are not served promptly and these customers may be lost to competition.
A good capacity planning strategy helps adequately plan manufacturing resources. Excess capacity means the manufacturer’s money is being spent inefficiently, and this could have been invested elsewhere for a profit instead. On the other hand, low capacity implies the inability of the manufacturer to produce as per what the customer wants at a particular period of time.
Types of Capacity Planning Strategies
1. Lead Strategy
The Lead Strategy involves an upfront investment in more capacity that is needed and is one of the most aggressive approaches used. Manufacturers plan to increase their capacity in advance even before the actual demand increases. This takes care of anticipated demand increases. Many manufacturers use this strategy to gain market share against competitors. This is also used when competitors are prone to inventory shortages especially when demand skyrockets. The Lead Strategy has its own risk also, as if the actual demand does not match the predicted demand, manufacturers are left with excess inventory to be stored.
2. Lag Strategy
The Lag Strategy is much more conservative than the Lead Strategy as it waits until the current capacity is stretched to its limits before adding more capacity. In this strategy, manufacturers respond to actual increase in demand and boost capacity after the current operation runs in full steam. Here, manufacturers avoid the problem of storing excessive inventory but might end up losing customers to competition.
3. Match Strategy
The Match Strategy usually adopts a mid way between the Lead and Lag strategies. Instead of boosting demand ahead of time or increasing demand after the existing capacity is exhausted, this strategy uses smaller incremental changes to the manufacturers’ capacity. This is done based on the fluctuating conditions in the marketplace. Despite being more complex in nature, this is a safer bet for most manufacturers as it is much more risk-averse than the other Capacity Planning Strategies.
4. Dynamic Strategy
This is a much more safer forecast driven strategy. It involves adding capacity large or small, before it is required, based on actual demand and sales forecast figures. Since this is data-driven, it proves to be much more accurate for manufacturers to plan their capacity targets and avoids wastage or shortage of capacity. However, this type of strategy does depend on good capacity planning tools which can drive accurate forecasts.
Benefits of Implementing Capacity Planning Strategies
1. Monitor Operations Costs
A sound Capacity Planning Strategy incorporates all relevant aspects including personnel, facilities, budgets, production schedules and supplies. This can help manufacturers carefully monitor all production costs especially during periods of growth and recession. When manufacturers are able to foresee projected capacity needs, it allows them to accurately budget for upcoming changes, and apply financial resources where needed. This can also help develop relevant delivery schedules for supplies and shipping schedules for completed products.
2. Ensure Adequate Availability
With a Capacity Planning Strategy in place, manufacturers can ensure they have the necessary resources to deliver work even before a contract is signed. The Capacity Planning Strategy guides manufacturers on the scope available to undertake new projects along with inputs on sufficient resources to cater to the requirements. Using actionable analytics, manufacturers get access to key data points which accurately report the possibility of overtime based on current work schedules.
3. Maintain Production Cycles
Manufacturers can maintain proper production levels as per expected business cycles with a good Capacity Planning Strategy. Seasonal demand fluctuations can be planned for using historical data and production capacity can be easily managed to handle the rise in demand. Capacity Planning Strategy also identifies when the business cycle might deteriorate so that seasonal workers can be employed accordingly and unnecessary expenses can be avoided.
4. Identify Skill Gaps
Adequate capacity planning can help identify the relevant skills required to deliver key projects and plan for any skill shortages well in advance. Manufacturers can plan work accordingly and forecast skill requirements and also make decisions regarding in-house skills vs outsourced skills. Manufacturers can easily plan employee training needs and decide how projects will get delivered in the future.
5. Plan New Production Facilities
As your company grows, you may find the need to open new production facilities. Using your capacity planning information from your existing locations, you can develop a more accurate projection of needs for facilities and personnel levels, and of the kind of production that can be expected from the new location. This is a valuable tool when putting together the business plan and budgets for your company’s growth.
6. Meet operations budget:
When manufacturers use appropriate capacity planning tools, they are able to meet demand with the least amount of waste and increase their utilization rates. It also helps them meet their budgetary requirements based on their projected sales or demand forecast and reduce additional expenses.
Capacity Planning strategies can help increase operational performance and move closer toward achieving output targets. However, if your Capacity Planning Strategy is not customised to your company’s business model, you might land into a crisis.