What is Capacity Planning?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 March 2020
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Capacity planning is any strategy that is used to identify the amount of production required to satisfy the demand for the goods and services produced by a business. The idea is to balance the purchase of resources, the maintenance of production facilities, the hiring of labor, and the final output so that consumers have a steady supply of the products they desire. At the same time, capacity planning also seeks to increase profits by eliminating unnecessary waste, including the overproduction of any good or service.

The actual process of capacity planning will vary somewhat from one industry to the next. While there are factors unique to each industry that help to shape the approach to effective planning, there are a few basic elements that tend to apply in any situation. Many of these have to do with adjusting the amount of production based on anticipated demand for the products, both now and in upcoming production periods.


A simple formula for capacity planning in manufacturing situations involves identifying the number of machines used in the production process, along with the labor needed to operate those machines. That figure is then multiplied by the number of work shifts that the facility operates on a continual basis. For example, if the idea was to determine the capacity planning per day, and the plant operates around the clock using eight-hour shifts, the number of work shifts utilized would be three. Finally, factors such as the utilization of raw materials and the rate of efficiency of the production process will also impact the total capacity planning process.

With most attempts at capacity planning, various approaches will be taken to maximize the efficiency of the production process. One approach is known as the lead strategy. This is simply the process of adding capacity because there are indicators that the demand will increase within a given time frame. The idea here is to prepare for the increased demand by manufacturing goods that can be warehoused and used to meet the higher demand as it commences. If the anticipated increase in demand fails to materialize, the business is left with a high inventory, which in turn drives up its operational cost.

Another approach to capacity planning is known as lag strategy. Here the idea is to meet the increased demand as it occurs, rather then preparing for it in advance. This may be accomplished by operating more machines, or expanding the manufacturing effort from five days per week to operating on Saturdays and Sundays as well. While the possibility of accruing large inventories that do not move is reduced, there is the chance of losing customers to the competition, if the production cannot fulfill demand within a timely manner.

The match strategy is a third approach to capacity planning, and is sometimes thought of as a compromise between the lag and lead strategies. With match strategy, the idea is to incrementally increase capacity as the demand begins to increase. If handled very carefully, this approach allows the supplier to always stay slightly ahead of the demand, and fulfill orders without delay. At the same time, it minimizes the potential for accumulating an unnecessarily large inventory.


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Post 1

Here we go -- the classic moving target. The demand for a particular product can be very hard to figure out from one day to the next and it can be very expensive to overproduce an item.

Here are two examples -- it seems that Apple has gone through several periods when there was more demand for iPhones than what the company could actually produce. On the other hand, Casablanca made a huge error in the 1970s in trying to meet the expected demand for solo albums from individual KISS members -- the result was the company made too many of them and those things wound up in discount bins in a hurry.

In both scenarios, we're talking about a lot of money lost by the companies that didn't accurately determine how much demand there would be for products.

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