In an ever-changing world, it might
feel like you need a crystal ball to plan for your company’s future. How could
you know how much product you’ll need to order in three months, six months, or
a year if orders haven’t come in yet? How do you adapt to evolving customer
expectations? Or scale your business fast to avoid stock-outs if a surge of
orders comes in?
The answers to these questions are simpler than you might think.
Successful businesses of all types use capacity planning to answer similar
questions every day.
What Is Capacity Planning?
Capacity planning is the practice of planning production and workforce
needs to make sure your supply chain is equipped to meet demand. Capacity
planning lets businesses know how and when to scale, helps identify
bottlenecks, and mitigates risk.
The 3 Types of Capacity Planning
The three types of capacity planning make sure you have enough, but not
too much, of three major resources for both the long- and short-term. You’ll
want to plan weeks, months, or even a year in advance.
1. Product capacity
planning
Product capacity planning ensures you
have enough products or ingredients for your deliverables. For a florist, this
would be flowers, vases, and cards. For a pool maintenance company, this would
be things like chlorine that are required to do the job.
2. Workforce
capacity planning
Workforce capacity planning ensures
you have enough team members and work hours available to complete jobs. This
type of planning will also show you when you need to hire more employees and
help you determine how far in advance you need to start recruiting based on the
length of your onboarding process.
3. Tool capacity
planning
Tool capacity planning ensures you have enough tools to complete jobs.
This includes any trucks, assembly line components, or machinery you need to
manufacture and deliver your product.
How to Start Capacity Planning
There are three basic steps to
capacity planning.
1. Measure
First, you’ll need to measure the
capacity of your resources. How many deliveries can each of your drivers make
in a given period? How many orders can fit onto each of your trucks? How many
hours does it take your fleet manager to plan 50 deliveries? It’s important to
answer these types of questions as accurately as possible because the rest of
your plan will be based on these numbers.
2. Analyze
Once you have accurate measurements,
you can spend time analyzing this information. Making graphs will help you
understand the numbers and make demand forecasting easier.
3. Formulate
The final step is taking all of the information you’ve gathered and
formulating a plan. You can make calculations to see how much it will cost to
fund new projects or hire a full-time employee vs. bringing on seasonal
part-time workers. You could also calculate the ROI for upgrading a piece of
machinery or adding assembly lines to your production facilities. The
formulation stage helps you see what the likely outcomes are for various
options, so you can make the best decision.
How Is Capacity Planning Different
From Resource Planning?
Resource and capacity planning
sometimes get confused with one another, but they are different things – and
you need both. Capacity planning is more high level and helps you determine
what and how many resources you need to meet demand. Resource planning takes
the number of resources available (as determined by your capacity planning) and
allocates them to individual projects.
For example, let’s say you run a
flower shop like The Little Posy Co., and Valentine’s
Day is your busiest time of the year. You would use capacity planning to
determine if you need to hire more employees, bring on seasonal workers, or
increase your stock of flowers before February 14. Once you’ve determined how
many workers and how much stock you’ll have in February, you would use resource
planning to allocate those resources. So, if most of your demand is for vases
of red and pink posies, you could allocate the largest portion of your
resources to creating those floral arrangements.
The Benefits of Capacity Planning for
Modern Business
Capacity planning helps you deliver
on the things that are important to your customers. Incorporating this type of
strategic planning into your process will help you meet due dates, effectively
scale your business, and increase your bottom line.
☑ Reduces stock-outs
Customers don’t like to wait, and if
they don’t have to, they won’t. The internet has made it easy for consumers to
find products somewhere else if you’re out of stock, so you need to reduce
stock-outs if you want to minimize customer churn.
In 2004, the Harvard Business Review
published the results of a global study where they
assessed the behaviors of more than 71,000 customers faced with stock-outs.
Depending on the retail category, 21% to 43% of consumers went to another store
to purchase an item if it was out of stock. You could lose a third of your
potential sales for an item if it’s out of stock and, worse yet, that customer
may never come back.
Capacity planning can help you avoid
stock-outs, and the more you do it, the better you will understand your unique
demand. The capacity planning process will help you see how demand fluctuates
during different seasons (such as holidays) or how it is affected by events
(like kids going back to school). You’ll be able to use this insight as a guide
for overall decision making and supply chain management.
☑ Increases delivery capacity
McKinsey and Company published a 104-page compendium that illustrates
the importance of delivery capacity. Shoppers not only want to be able to have
products and food delivered to their door; they want quick turnaround times,
which means your delivery process needs to be operating at maximum efficiency.
McKinsey’s report explains that e-commerce has made up more than 40% of retail
sales growth in the United States since 2016, and it isn’t showing any signs of
slowing down.
As online sales grow ever more
popular, delivery capacity is becoming an essential component for many
businesses. In another global consumer study conducted by Oracle Retail, 92% of
retail shoppers said they would like or love “free one-day delivery by whatever means is most
expedient.” Capacity planning ensures you have the workers available to deliver
products whenever needed, keeping your business competitive.
☑ Identifies process inefficiencies
When you start capacity planning, you
have to ask, “what is the maximum capacity of this resource?” Whether you’re
looking at people, equipment, or products, you’ll gain insight into what
factors limit capacity, and you’ll be able to easily spot bottlenecks that can
be fixed or improved.
For example, let’s say you run a
delivery business. Capacity planning reveals that the amount of time it takes
your fleet manager to plan routes is preventing your business from being able
to take on more deliveries. You realize that even though you have the trucks,
drivers, and products to deliver more orders, your fleet manager requires a lot
of lead time in order to effectively plan routes for new orders. You could use
this insight to replace your manual planning system with route optimization
software. In fact, one of our clients doubled their scheduling capacity by
doing just that.
Southern Star is in charge of transporting natural
gas to seven states in the U.S. In a single week, Southern Star’s 250
technicians can perform up to 2,500 maintenance activities on pipelines that
span 5,800 miles. Capacity planning helped Southern Star spot inefficiencies in
their scheduling process. As a result, they started using OptimoRoute, and now
they are able to fit 100% more tasks into pipeline maintenance and
service schedules.
☑ Facilitates risk management
At its core, capacity planning is a
roadmap for your business. Both short- and long-term capacity planning help
businesses understand their strengths, weaknesses, and limitations. You’ll be
able to make informed decisions about how fast you should scale your business,
when is the best time to launch a new product, and when you need to hire new
employees.
Capacity planning will better prepare
you to overcome obstacles, too. No matter how much planning you do, you’ll
still need to be able to respond quickly when unexpected challenges arise. If
your supplier suddenly goes out of business or three of your 10 drivers come
down with the flu, you’ll need to have high-level plans in place to use as a
guide, so you can make smart adjustments quickly.
Very nicely explained. Thank you for the great article.
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