Capacity Planning/ Modelling with example

Definition:

Capacity Planning is a process of estimating resources required by an organization to meet  production demands over-time.

Why should I perform Capacity Planning?

Organizations usually face fluctuating production demands. Most of these fluctuations are seasonal and therefore can be anticipated and catered to with some amount of smart planning. Capacity Planning can help achieve high service-levels at lower costs enabling you to differentiate in the market while delivering customer delight.

How do I perform Capacity Planning?

It is in fact straight-forward and easy to perform. Let us take an example of a biscuit manufacturing unit. Follow the below steps:

Step 1: Identify your unit of product, which here is a box of biscuits

Step 2: Identify resources that determine your production capacity, which can be the number of machines employed or people employed

Step 3: Estimate your demand numbers per unit time. If you are doing an annual  capacity planning, demand per month can be a good unit to use. As can be seen below, the demand is unevenly distributed.

demand distribution over an year

demand distribution over an year

Step 4: Link your demand to the capacity that you might need to maintain. For example if 1 machine can produce 4,000 boxes of biscuits a month then you will need 6 machines to produce 23,000 boxes of biscuits. Similarly if one employee can contribute to 6000 boxes per month then 4 employees will be needed. Assuming these capacities, let us look at the employees and machines you will need to meet each months demand.

capacity model for the year

You will note that in the above table you have higher needs for capacity in months of March, April, September and October. With this information in hand you will need to plan your capacity to meet the production demands.

How can I optimally plan my capacity?

You can device some smart strategies to optimally plan for capacity:

  1. Aggregate your production: Aggregate your production to a single location to smoothen the sharp demand fluctuations.
  2. Manufacture in advance: If your product has a higher shelf life, try to maximize capacity utilization during low demand periods and increase your inventory for demand spikes. This strategy is contingent on your cost of storage for finished goods.
  3. Explore Just-in-time ramping up: Explore strategies to ramp up production for those shorter higher demand periods. Can you lease machinery? Can you hire skilled employees on contract?
  4. Develop fungible resources: This strategy mainly applies to human resources. Can your employees be trained on multiple skills? Assuming you have other products, say cakes, whose demand inversely correlates with biscuits, you can shuffle excess capacity from one product to another.

Apart from some simple heuristics outlined above, you can apply sophisticated statistical methods to estimate your capacity more accurately. More often than not, the above guiding principles should suffice your capacity planning needs.

Please let me know your thoughts/ suggestions through comments.

Also, in case you need assistance with your business, get in touch with me at juned.bizadvisory@gmail.com

One thought on “Capacity Planning/ Modelling with example

  1. If you manufacture finished goods much ahead, there are huge risks in the form of blocked capital, cash flow issues, might have to pay your supplier without any guarantee of sales, damages, perishability, inventory storage capacity issues, price fluctuation risk -if the market price goes down then losses can take down the company. This is why it is so important to get the demand estimates accurately and business control functions don’t allow managers to err on the higher side of estimates.

    Liked by 1 person

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