Capacity management is a strategy utilized by businesses to make the best use of production efficiency with respect to the demand for a service or a product. The eventual goal of capacity management is to:

  • Identify and remove any bottlenecks that hinder the manufacturing process, or service delivery process. 
  • Increase the speed of production by optimizing resources at hand, eliminating the unproductive time, and other constraints that may negatively affect capacity.

Capacity management helps companies conquer challenges that arise when they need to meet customer demands—be it short- or mid-term. It also helps manage the supply chain operations, and develop organizational plans for the future. 

Organizations need to review how much of their resources are available, to make sure it reaches the production output during a given period. Manufacturing, retail, service, and information technology heavily use capacity management.

In nutshell, here are the key objectives of capacity management: 

  • Recognize capacity requirements to fulfill projected workloads, both current and future 
  • Create and sustain a solid capacity management plan
  • Make sure that performance goals are duly met within the right time frame and budget
  • Keep a check on capacity consistently to assist the service level management
  • Support in determining and solving incidents
  • Examine the impact of variation on capacity and take proper measures to better performance where it is more cost-efficient

Why is capacity management important?

Capacity management is an important part of an organization, but why? Here are a few points to discuss the same;

  1. Capacity management helps organizations improve their ability to evaluate costs, particularly during growth seasons or recessions. It helps in identifying sudden shifts in prices and helps them act as per the situation. 

  1. Schedule production cycles ahead of time and optimize production efficiency.

  1. Reduce the costs in general of doing business. 

  1. Helps in the management of inventory better and dealing with issues within the supply chain.

  1. Assign human and material resources in a better way.

  1. And most important, capacity management helps in the scaling of the business. It provides a deep analysis of how to operate before expanding the business. 

Capacity management process

Here’s what a typical capacity management process may look like. However, these processes differ from organization to organization. 

  1. Identify, and break down future plans. Forecasts and opportunity pipelines help understand what kind of demand would arise in the upcoming seasons. For example, more people need to be hired, more machinery is needed, or the previous one needs repairs or maintenance.
  2. Understand customer demands, and analyze opportunities. Market trends and customer demands are ever-evolving. This helps in creating an opportunity pipeline. It is crucial to understand if any unpredicted events or seasonal factors affect the demand side. 
  3. Deep evaluation of the output of existing resources. Before there is an increase in production with respect to the newly devised plan, the organization must evaluate if the existing resources or infrastructure can manage that production. If it cannot, then you may have to procure or lease new machinery, devices, or equipment. Secondly, to operate these machineries or work on the devices, more manpower would be needed as well. At the same time, quality control cannot be missed. In the end, the output should be of the best quality. 

  1. Carry out resource and capacity planning as per the decision. Once a proper plan is in place, it’s time to implement and execute it. If the need is to introduce more devices or machinery to grow production, then the plan should be to purchase new machinery/devices, install them, kickstart the work and fulfill the additional requirements on time.

  1. Examine production capacity on a consistent basis. Lastly, if you don’t monitor and review the production capacity on a continuous basis, you might miss important factors. Furthermore, just like any other process, there is always room for improvement

Capacity management vs capacity planning

Oftentimes, there is confusion between capacity management and capacity planning. While they are similar in certain aspects, they are quite different too. Firstly, capacity management is broad in terms, whereas capacity planning can be referred to as the subset of capacity management. However, the end goal of both is to ensure that there is the right amount of capacity at the right time to meet the demands.

As per Mike Wise, author of the Microsoft DataDriven blog, “one big difference that sets apart capacity planning from capacity management is that capacity planning has a “throwaway” quality. That is to say, that capacity planning is something that is done upfront. It is the needs intake and assessment, but capacity management is the entire lifecycle of monitoring, collecting data, analyzing data, optimizing infrastructure, and landing back on monitoring again.”

Digital organizations that plan to put forth a winning capacity planning and management strategy should think of these terms are separate entities. 

Wrapping up, capacity management is a continuous cycle that aims to enhance performance. On the contrary, capacity planning is an activity conducted initially.  

Best practices to improve capacity management

Before you dive into capacity management, it is important to prioritize it and give it your undived attention. Effective capacity management includes the following components:

  • Historical data. Refer back to previous problems that occurred in capacity management and look for any similar patterns. Maybe there was a specific month or a season when managing capacity was difficult?

  • Resource factors. Consider how many people have left since the last capacity management cycle, and assess how would that affect a period that would be loaded with work. You must also keep track of people you hired externally on a short-term basis. That way, you can keep note of working hours, costs involved, and their availability. 

  • Operational factors. Examine and manage any operational factors that may influence how the work capacity is managed. For example, implementing cloud contact centre software can enhance the efficiency of customer service operations by providing features like automatic call routing, real-time analytics, and integration with other communication channels.

Here are a few best practices to make the best of capacity management

  • Assign capacity as per business priorities. This lets the teams concentrate on what’s important, and focus on projects with a greater potential for ROI.

  • Keep an eye on actual business demand. It’s essential to know what demand has been placed on the teams. From clients who purchase the services, to internal projects that unlock business growth. Solid knowledge of the demand ensures that the supply of the resources remains at adequate levels.  If companies needs to expand their staff to handle any additional work loads, it may make sense to contact a virtual assistant service to help carry the burden.  

  • Strategize for different situations. When it comes to work, there are always multiple variables at play. It is essential to understand what these variants are—and how they can impact the capacity. Doing so ensures that the solution to such scenarios is the most efficient. For example, understanding risks related to resources, and planning for situations where there is a dearth of resources. 

  • Watch for distractions. In IT particularly, distractions are a common occurrence. It can take away the resources needed from prioritized work. For example, a staff employee directly reaches out to a developer and requests them to take up a coding job, that needs to be done by the staff member only. Such small, yet significant scenarios can eat up the time needed to focus on work that is more important. 

  • Plan for deviations. As we know capacity planning is mostly based on estimations and forecasts. Unfortunately, forecasts are not always accurate. That is why capacity management planning would need recurring tweaks. On the other hand, there can be changes within the organization too. For example, an urgent project needs to be prioritized suddenly, and the other projects take a backseat. 

Capacity management is always a continuous process. Once a plan is devised, it is pertinent to update it regularly too. It is crucial to conduct capacity management planning on an annual basis to stay abreast of all important internal and external factors that influence capacity.

Key terms related to capacity management

Capacity management is a broad concept and consists of diverse terms that you may or may not be aware of. We will define a component, capacity, capacity report, Capacity management information system (CMIS), performance, capacity managers, and capacity plan.

Component. As per the CIPS Institute “A component is a fundamental structure of a particular service, an essential part of a service.” For instance, a database is the ‘component’ of a server. Components are substantial, so they need to be purchased, built, maintained, and monitored.

Capacity. The definition of capacity as per the CIPS Institute is that it “represents the available resources that can be leveraged to meet a certain level of demand.” To illustrate with an example, in a restaurant, the capacity is:

  • Number of staff available
  • Number of tables and chairs available
  • The time frame when the restaurant is open 

Capacity plan. Basically, defining scenarios for expected demands. For example, resources required in a certain time frame. Capacity plans help businesses deliver the right customer service.  

Capacity report. A document that includes data related to the service provided, resources deployed, and the overall team performance. Capacity reports help avengers take the right decisions. 

Capacity management information system (CMIS). A virtual repository to gather and store data related to capacity.

Performance. Capacity management, it is a metric that reflects how fast a system can respond to requests.

Challenges faced during capacity management 

Capacity management is an essential task within a workspace. But not an easy one. As per Forbes, below are common challenges faced during the process of capacity management. Let’s explore them in detail.

Data challenge. On a daily basis, capacity planners need to tackle a truckload of information that needs to be added to project spreadsheets, mostly manually. For a seamless capacity management process, the data added needs to be accurate and mentioned in a proper format. For example, the same units of measure. Once the data is added, they need to incorporate details about demand and supply. After which they make use of formulas to ascertain information about the available capacity. 

Complexity challenge. A complexity challenge is quite similar to a data challenge. Since capacity planning involves the managers working around with countless calculations and complex formulas, mistakes are bound to occur. For example, adding inaccurate data to the spreadsheet. Unfortunately, such occurrences can deter the entire process. Furthermore, things can worsen because capacity management generally involves various levels or layers. Accomplishing all of them requires time, resources, and data. In nutshell, too many employees involved in the planning process increase the chance of mistakes. Therefore, there have to be proper processes in place to avoid this. 

Communication challenges:  Communication is the cornerstone of any successful company. Lack of communication or worse inadequate communication can lead to a sea of problems. In order to steer clear of such scenarios, it is crucial that all employees that are part of the capacity management process exchange information on a regular basis. Clear and transparent communication ensures that your capacity management process will run smoothly.  The business communication tools will make the process quicker and simpler.

Now that we’ve discussed the recurring challenges during a capacity management process, it’s time to learn the most efficient strategies to overcome the issues.

Strategies for capacity management 

Managers across the globe have come up with a few capacity management strategies to attain better results, in order to grow the business production capacity. Take look at these extensively used capacity management strategies:

  1. Lag strategy: In this conservative and reactive strategy—a manager first understands the capacity, and then waits up until there is a proper and steady surge in demand. After this, the manager increases the production at a specific level that is enough to meet the market needs at that moment. However, this strategy comes with a con. The business might miss out on the chance to sell more in case of the demand skyrockets unexpectedly because increasing production takes time too.  Secondly, the lack of inventory may lead to customer attrition. Please note that this strategy is used by managers when extra capacity is required after the company is already functioning at a full capacity or more. 

  1. Lead Strategy: While the lag strategy is more subtle, and ridden with fewer risks, the lead strategy is almost the opposite of it.  That is, it is more risky and aggressive in nature. In this case, the company increases the capacity of production even before there is a surge in the demand. A strategy like this is achieved with a simple assumption that in case the demand goes up in the future, the additional output will suffice. Clearly, this is not a viable strategy for small businesses. Plus, there are a few cons to this approach too: increase inventory storage cost and inventory wastage.

  1. Dynamic Strategy: Dynamic strategy is driven by forecast, and mainly focuses or relies on current market trends. Here, the manager takes the sales data, and current trends, and analyses them together to make tweaks in the production. Dynamic strategy is probably the safest strategy of all because managers make use of data with decent accuracy which helps in qualifying their capacity targets. Additionally, it diminishes the risk of scarcity or loss of inventory.

  1. Match Strategy: Match strategy is a medley of lead and lag strategies. Here, the company increases its capacity after examining the current market demands. However, the additions are small. As and when it is apparent that there will be a rise in demand, the company skyrockets in the production process. However, the increase again is not huge, it’s still small.  So, when the demand rises, the company can work on expanding sales. 

Capacity management examples

Capacity management is used by software companies, finance operation teams, creative agencies, and product teams, alike. In this we take the example of a TV manufacturer. There are two things in place for a TV manufacturer:

  • They need to ensure that they are able to meet the demands of consumers all year round with the resources available. 
  • Recently the company forecasted that the demand for televisions may surge because the world cup starts in 8 months. Furthermore, they also realized that HD TVs would be in most demand.

Since there will be a surge in demand, the managers of the company need to understand the approximate number of TV sets that need to be sold to meet the growing demand. So, automatically, the next step is to examine if the capacity present at the moment is adequate to meet the additional demands. An analysis like this may reflect that they would need more resources, and manpower to handle the growing demand, but it is also forecasted that the demand might decrease as soon as the world cup comes to an end. So, here the company may want to rather lease the machines ], or work with different contractors for that period of time, instead of buying new machines or hiring new people. 

As soon as the lease and manpower are in place, production can commence. However, the company will have to start it at least 2-3 months before the world cup starts. This will ensure that the TV sets have reached the retail channels, and are available exactly when there is a rise in demand. 

Few more examples,

  • A creative agency can deliver 700 designs per week.
  • A bakery can bake 80 pies per day
  • A car company line can assemble 200 cars per month.

Related posts