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.
Capacity planning strategies 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 an actual increase in demand and boost capacity after the current operation runs in full steam. Here, manufacturers avoid the problem of storing excess 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 strategy 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.
Capacity Planning Strategy Benefits
1. MONITOR OPERATIONS COSTS
Capacity Planning Strategies 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 Strategies are not customized to your company’s business model, you might land into a crisis.
Industries That Utilize Capacity Planning
Capacity planning is typically used across three primary industries-
- Production planning and manufacturing capacity
- Planning service capacity
- Planning human capacity
1. MANUFACTURING INDUSTRIES
Many medium and large scale manufacturing industries deploy capacity planning concepts to decide the total production capacity. This is used in several automotive companies, appliances manufacturing, process industries, pharmaceuticals and semiconductor manufacturing industries.
2. SERVICE INDUSTRIES
Since service industries have their own unique challenges as they cannot be stored like products, capacity planning is used as a tool to match the supply and demand. This can provide the right level of service to customers at the right time. Some examples are; cloud computing services, airline seat capacity and fast-food restaurants.
3. HUMAN CAPACITY
Human capacity includes those organizations which sell specific skills of their team members. This can include project management, technical service technicians and data centres. Many organizations that use human capacity include financial auditing companies, legal firms and engineering project companies.
Capacity planning challenges
Most manufacturers go through five common capacity planning challenges, irrespective of the operational strategy used. These challenges could impact the production flow no matter the level or scale or the complexity of the organization.
Siloed data and collection methods
Traditional manufacturing processes have mostly relied on siloed data to plan the production capacity. Disparate, unconnected systems imply manual reconciliation of data before consumption. This results in higher time consumption and data could get outdated even before it can be applied and used. Since most capacity planning tools rely on inputs from demand forecasts, supply chain, warehouse management etc, a disconnected system can be risky as it increases reliance on manual reports and human capability to identify and manage trends.
Inferior data quality
Very often, manufacturing operations involve capacity data arising in the form of records and reports which then must be manually aggregated before the final information can be consumed. After this is done, planners add in the much needed supply and demand data and develop a formula to arrive at the available capacity. During this process, if at any step, these multiple data inputs are inaccurate or outdated or if they exist in multiple formats, this again needs to be formatted and standardized before they can be utilized for planning purposes. And since most of these data points are not connected, any new iterations must go through the same process all over again.
Complex formulae and calculations
Planners use many complex formulae and calculations to arrive at the final capacity plan. This can include several aspects like the material availability, load by work center, alternate sourcing, attribute-based planning rules and more. To accommodate all of this, manual spreadsheets have long been the “go-to” for planners to calculate these elements, as accurate calculations are crucial. While doing this, if the data entry errors or bad data are present, the entire capacity plan could be wrong. In addition to this, a lag based on the time needed to assemble the data, new information and changes must be input into several sources, again lengthening the time to produce a plan and creating the risk of errors.
Multi Level planning
In most manufacturing environments, capacity planning is often done at different levels. A rough cut planning is usually done at the master schedule level and this is used for short-term planning may be for a week to two months. Medium or aggregate planning uses a 12-18-month planning window to provide a longer view that allows the organization to ensure that demand can be met long-term. It also helps smoothen supply chain challenges to look at production cost reductions. Each of these levels need larger data sets and longer time periods as they are used for multiple decision-making tasks. Due to this, the challenges of data collection, data quality and formulae and calculations are multiplied in complexity, creating possibilities of errors with those issues.
Gap in Communication
As the capacity planning process involves so many dynamic and moving parts, and since very few of them interconnected, there is a chance of a possible breakdown or gap in communication which can be risky to the integrity of the capacity plan. This is true for supplier communication and is also true internally where siloed systems for purchasing may not communicate with those in production or scheduling. This can end up reducing the collaboration and leaving capacity planners open to being blind-sided by new data, missing data or errors in existing data.
Capacity Planning for Manufacturing – Process Involved
A good process plan can help manufacturers optimally configure the system to ensure SLAs are met while only investing the necessary resources needed to get the work completed. This helps manufacturers optimize the production process and make them prepared for the future.
1. UNDERSTANDING THE SERVICE LEVEL REQUIREMENTS
- The first step is to break down the manufacturing job or production order into various categories.
- This can help create a structured flow to quantify the exact user expectations. It includes establishing workloads, determining the unit of work, and setting service levels.
- Manufacturers can then decide how each work task will be organized based on labor availability, or the complexity of work involved.
- Finally a “service level agreement” lays out the acceptable parameters between the manufacturer and the consumer.
2. ESTIMATING AND ANALYZING THE CURRENT CAPACITY
The next step is for manufacturers to take a deeper estimate of the existing production schedule to evaluate the final capacity. Manufacturers usually analyse separate workloads and follow these steps:
- Compare the measurements of specific workloads mentioned in the SLA with the overall job objectives.
- Evaluate the actual usage of multiple resources across the system
- Check the resource utilization for each workload and then decide which of these consume more manpower.
- Finally calculate the most time consuming aspects of each workload to arrive at the response time taken for each job.
3. PLANNING FOR FUTURE REQUIREMENTS AND DEMAND
- Once the current capacity is analyzed, manufacturers can then plan for future demand.
- By accurately forecasting the processing requirements, a system or process overload on the manufacturing set up can be avoided.
- Manufacturers would need a clear estimate of the actual incoming work that is expected in the coming few months.
- Finally, they can configure the most optimal system needed to satisfy these requirements over the forecasted period of time.
How to Structure your Manufacturing Capacity Planning Template
Here is a checklist of variables to consider while structuring your Manufacturing Capacity Planning Template :
The most basic element which is the number of units available of a specific resource for a particular length in time. Manufacturers need to also account for any gaps/ holidays/ breaks / maintenance downtime if any, while calculating the capacity.
2. SETUP/RUN HOURS
The next variable is to define how much time a specific operation on a job will take to eventually move through a resource. This is made up of a combination of setup time, which is a static number and the run time which depends on the number of items on the job. Finally, the total hours are compared to the total capacity of the resources needed for planning.
This variable is a measurement of the capacity usage and measures the total usage of the resource. It is important for capacity planning, as it is a measure of the actual capacity compared to the estimated capacity.
Efficiency is defined as the measure of the actual setup/run time versus the estimated setup/run time for a work job. Efficiency can help track how much capacity is needed actually and the difference from the original plan. When this is multiplied across several job loads, efficiency can be a critical measure to define final performance.
5. QUEUE TIME/MOVE HOURS
It is important to understand that just because an operation is scheduled to complete at a certain time using one resource, this doesn’t imply that the subsequent resource can immediately start running it. It usually takes a material handler to move a specific job from one resource to the next. This can also impact the machine’s utilization, since it may sit idle while waiting for the next job to be available.
6. OFFSET HOURS
From a capacity planning standpoint, a work job may progress in different ways including offset hours. These hours that can always be offset to another job, and can help save time and resources. Knowing ahead of time of how one can plan for operations that can be offset can make a massive impact on the manufacturing capacity planning.
7. CONCURRENT RESOURCES
Many times manufacturers need more than two or three resources to be available at the same time to complete a job operation. Also, the ability of the worker to run all three together may also impact the completion of the job. Sometimes it may need multiple labour resources to run each operation. This can further get complicated once all of the jobs are multiplied and therefore concurrent resources is an important aspect to consider.
With a strong Capacity Planning Software, manufacturers can ensure a structured approach to capacity planning and avoid surprises along the operations value chain. Here is a great comprehensive reference guide on how to go about selecting a sound Capacity Planning Software and how it can help manufacturers.