What Is Capacity Planning: Complete Guide with Examples [2024]

Planning for the future and understanding how much capacity you’re going to need for any task is tricky. You want to ensure you’re prepared for what lies ahead, but how do you establish you’re not over or under-supplying your product? How do you know if a surge in orders is coming so that you can scale up your business in advance?

You can achieve all of that and more by understanding and implementing capacity planning. With effective capacity planning and the right resource management tool, you can deliver priority service business projects on time and within budget. However, missed deadlines and customer dissatisfaction can be a result of poor capacity planning.

In this blog, we will talk about the effective capacity planning process and why it’s essential for your business’s future.

What is Capacity Planning?

A capacity plan focuses on determining the production capacity for an organization to meet changing demands for its products or project capacity requirements.

The capacity planning process is a way to determine the workflow and capacity to complete project tasks in a given time period. In this case, project managers need to monitor forecasting demand, and plan forecasts based on market trends and limited capacity requirements. Later, the individual project managers allocate resources and tasks.

It improves your decision-making process and helps you make decisions about the number of products you need to produce (production capacity planning), how much staff you need to hire (workforce capacity planning) when you should invest in new equipment, and more. Essentially, it enables you to anticipate your future needs and plan accordingly.

It’s important to get it right because inadequate planning causes loss of customers and business, while excess capacity-based planning drains the company’s availability of resources.

As businesses, capacity management and strategic planning help you identify the resources you need to meet forecasted demand. The amount of output a company can generate is directly linked to its capacity level.

Here are some capacity planning examples for your better understanding:

Capacity planning example 1 – Restaurant

There is a restaurant, operational all days of the week. They have a “Happy Hours” offer every weekend between 3 PM to 7 PM. So, they have more traffic during these hours compared to regular operational hours. Here, capacity planning will help them stock necessary raw materials in advance so that they can meet the food order demand.

Capacity planning example 2 – IT company

An IT company is all set to accept a big project that is going to benefit them a lot. With workforce capacity planning, they will have an estimate of new employees they require to deploy to this project. Tool capacity planning will enable them to acquire servers, computer systems, and other resources required to fulfill the upcoming project requirements.

Capacity Planning Types

Below are the main three types of capacity planning explained. 

1. Product capacity planning

The practice of calculating the production capacity required to fulfill true demand for products or product lines is known as product capacity planning. The aim behind making a production capacity plan is to make sure your production unit is capable enough to produce goods to meet the current demands without overproduction or underproduction.

2. Workforce capacity planning

Workforce capacity planning deals with maintaining the number of employees needed to fulfill the business needs considering future demands as well. Having a well trained and equipped workforce helps your product-based business grow well.

3. Tool capacity planning

Tool capacity planning aims to determine the number of tools, equipment, and machinery required to meet the demands of a business. Also, they are inspected to ensure they are well maintained, in working condition, and ready to be used in heavy future demands.

What are the Key Components of Capacity Planning? 

Here are the key components of capacity planning that you must know.

1. Know your capacity

Before you can start working on your project, you must ensure that the people helping you out with the strategic planning and project management are available when you need them. This means taking into account their vacation and sick days, administrative work, and other tasks they may have to do.

2. Forecasting future demand

You can forecast future demand by understanding the projects in your sales pipeline, the abilities necessary for those projects, which projects are likely to be completed, and when they will begin. Answers to these will help you in future capacity planning to meet customer demand.

Moreover, forecasting a month or two in advance helps to allocate tasks based on resource availability. Task allocation implies you assign tasks to your current team members from a list of tasks.

3. Discover potential opportunities for additional capacity

Now if you remotely realize that you may need extra capacity to meet your future demand, you need to identify the sources that can help you expand your capacity.

Can you put in more hours and get more work done? Can your workers learn in-demand skills so they can get a range of work done? Or should you expand your team members to increase human resource power altogether?

4. Evaluate your risks

Only after evaluating can you mitigate risk. You must know how to deal with the possibility that your workforce will burn out if you put too much pressure on them.

And it’s easy to fall into this trap as 77% of workers have experienced burnout at work, and burnout was the reason behind 50% of millennials leaving their job.

You must also calculate the actual costs of employing new staff, retrain existing ones and identify the risk of poorer customer satisfaction. Don’t forget to account for the missed opportunities caused by your inability to meet excessive customer demand and expectations.

Capacity Planning Strategies

Let’s understand different types of resource capacity planning strategies and move to strategic capacity planning.

1. Lead strategy

Our first kind of capacity planning strategy, lead capacity strategy, is an investment in inventory beyond what is needed. Manufacturers use this strategy to gain market share against competitors, who use it to expand their own capacity—provide stock for anticipated demand increases, and avoid shortages.

However, if actual demand does not match the predicted direction, manufacturers and retailers can find themselves stuck with excess inventory, which can be costly.

2. Lag strategy

The lag strategy is less aggressive than the lead strategy. In this strategy, manufacturers continuously monitor actual demand, respond to an increase in demand, and boost capacity before they run out of capacity by storing excess inventory.

Although manufacturers risk losing customers if their competitors react faster, they also have a chance to gain customers from their slower competitors.

3. Match strategy

This capacity plan is a middle-of-the-road strategy between the lead and lag capacity planning strategies. The match strategy doesn’t boost demand ahead of time or increase demand after existing capacity is exhausted.

Instead, it makes incremental changes to manufacturers’ capacity based on the conditions in the marketplace.

4. Dynamic strategy or adjustment strategy

The strategy involves adding capacity large or small before it is required, based on actual demand and sales forecast figures. This strategy is a much safer forecast-driven strategy that avoids waste and shortage of capacity. To ensure the accuracy of forecasts, companies should use capacity-planning tools based on information technology insights.

Capacity Planning: Main Benefits

Here are some of the primary benefits of capacity planning that businesses experience:

1. Tracking operational costs

Manufacturers use different capacity planning strategies to carefully monitor the company’s capacity, especially during periods of growth and recession.

These strategies also allow you to prepare a budget overview for upcoming resource capacity changes and apply financial resources where needed.

In addition, they help develop relevant delivery schedules for supplies and shipping schedules for completed products.

2. Guarantees adequate availability

Using a capacity planning strategy, you can ensure you have the necessary resources to deliver work before a contract is signed.

The real-time capacity planning guides manufacturers on the scope available to undertake new projects, and actionable analytics report how much operational time is needed based on current work schedules. Strategic planning ensures you never have insufficient capacity for any project.

3. Keep production cycles running

You can maintain production levels and increase delivery capacity by planning for seasonal demand fluctuations, using historical data, and efficiently managing the rise in demand.

The strategy also identifies when the business cycle might deteriorate so that you can employ seasonal workers accordingly, which can help to avoid unnecessary expenses.

4. Identify skill shortage

Capacity planning helps you identify inadequate skills using skill gap analysis in your available resource pool ahead of time period.

You can use training needs assessments and project assessments to make informed decisions about delivering projects in the future, and forecast skill requirements. You can thus make decisions regarding in-house and outsourced skills.

5. Helps you prepare for new production facilities

As your company grows, you may need to open new production facilities. Using information from existing locations, you can develop a more accurate projection of requirements for facilities and personnel levels. This is a valuable tool when creating budgets for your company’s growth.

6. Achieving the desired financial plan budget

Capacity planning is a technique that you, as manufacturers, can use for project management, handling production schedules, and ensuring you have enough inventory to meet demand. It also helps in budget tracking based on projected sales or demand forecasts.

In addition, capacity planning tools can help companies reduce supply chain expenses such as overtime pay for employees who work longer hours when needed. It helps to boost employee morale and retain them.

How Can Upper Play A Vital Role In Capacity Planning?

Be it capacity planning or load planning, Upper Route Planner has a crucial role to play in streamlining the entire delivery process. 

You might offer on-demand or weekly repeating services if you own a service company.  In addition to the long-term, implementing a short-term capacity planning strategy is mandatory for you. 

• Upper has assisted various field service organizations by providing the most efficient routes based on unique business requirements. 
• By reducing the time drivers spend on roads and increase productivity by up to 60%, Upper ensures that you get more done using the same or lesser resources. 
• By eliminating manual dependencies and digitizing the entire process, Upper has helped Parkwoods Products Motorcycle Parts achieve 200% more deliveries, thereby expanding their capacity. 
• Upper keeps note of every driver, stop, and route no matter how many projects you work on simultaneously. 

As a professional services business owner, this helps you gain clarity on the future workload and how efficiently your workers handle it.

This, in turn, enables you to optimize capacity planning (including team’s capacity planning) and identify areas for improvement, making it easier for you to come up with new opportunities for delivery business.

Try  Upper’s 7 days FREE trial to know how it works.