Imagine you own a coffee shop and serve excellent cappuccinos. To serve your customers consistently great coffee, however, you need the right amount of milk, sugar, roasted coffee, etc. Any mismatch in key ingredients will impact the taste of the coffee and may prompt your customers to choose some other shop over yours. So, you need to ensure a constant supply of different resources at the right time to offer your customers a consistent experience.
But isn’t it true for all businesses and large projects?
Any organization can have limited resources and diverse and often conflicting business goals. So, managing resource capacity well is critical to utilize business opportunities.
This is where capacity planning comes in handy in managing businesses and projects.
What Is Capacity Planning?
Capacity planning refers to assessing a project’s possible requirements and matching them with the available resources. It helps businesses ensure they have adequate resources to service demand. Here, resources mean people with the right skill set, processes, technology, and time. Organizations examine historical data, growth projections and market trends to determine their capacity to adequately meet future demand.
Failing at capacity planning can lead to employee discontent, delays in execution and dissatisfied clients, severely impacting the bottom line and profitability of any business. These challenges call for prudent planning as businesses can forecast the resources they need now or later to complete projects on time and within budget.
Example of Capacity Planning
Let’s understand the concept with the example of an organization that manages projects. The organization has grown steadily in the past years, enjoying high demand. Now, it wishes to increase its operational capabilities, as it anticipates greater demand and intends to meet it.
In that case, it’ll assess the sales data of the past few years by minutely examining if the sales increased or decreased in specific quarters of a financial year. Let’s assume the organization determines that its sales have grown steadily at an average of 25% per year. Then, it’ll predict future demand by examining past data and growth projections to determine how much the sales have grown annually.
The organization would analyze its current capacity by assessing factors like the number of employees, available tools and equipment and technology platforms. This process would help determine the organization’s current capacity to service projects. Now, it would examine its current capacity and the forecasted demand to assess the resources it would require in the future to meet increased demand.
This detailed assessment enables business leaders to assign tasks more efficiently, considering the prioritization and fallback measures needed. It also allows them to decide whether or not to take on new projects, fast-track existing projects, or modify their project planning to accommodate changes. They can also arrange the resources they lack to service future demand.
Now, let’s briefly touch upon its importance and benefits.
Importance of Capacity Planning
As mentioned, capacity planning enables an organization to budget and scale itself. On the budgeting side, it helps analyze how it’ll deliver the end products, including the time, workforce, and other resources like machinery and capital required.
Here are some reasons why it matters for businesses:
Helps Meet Demand
Organizations can adequately meet their customers’ demand for products or services through capacity planning. As organizations can preempt the resources required to meet current or future demand, they can service client requirements on time and within the predetermined budget.
Plus, when businesses meet client requirements consistently, they enjoy higher customer satisfaction and retention and create additional avenues for repeat business through goodwill and word-of-mouth publicity.
Helps Utilize Resources Effectively
Effective resource utilization is critical, especially when profit margins are under pressure due to global economic challenges and uncertainties. The capacity planning process helps organizations allocate and utilize resources effectively.
Thus, they can minimize resource wastage, reduce operational inefficiencies and better capitalize on business opportunities. In addition, organizations that use their human resources effectively report higher employee productivity and engagement and lower attrition rates.
Enables Better Expense Management
Organizations can better manage their costs when planning the resources needed to manage projects beforehand. For example, finding and allocating resources at the last minute can cost large sums.
On the other hand, capacity planning allows decision-makers to foresee the project requirements and arrange the necessary resources in advance to avoid any last-minute induction. Such foresight helps keep budgets in check and advocates astute financial management.
Boosts Strategic Planning Capabilities
It has an important role in strategic planning, as it helps businesses understand their current capacity and future demand. This way, they can plan their growth, diversification and expansion to align with their business objectives. It also helps businesses become more competitive and agile and adapt to the changing market requirements, helping them become more future-ready and prepared for disruptions and abrupt changes.
Thus far, we have listed the importance and benefits of capacity planning. Now, let’s understand the strategies around capacity planning.
Capacity Planning Strategies
There are three most adopted strategies, as listed below.
Lag Strategy
Organizations use the lag capacity management strategy to manage the changing demand patterns. The concept is based on the idea that a time lag exists between when changes in demand occur and when the organization needs to make capacity adjustments. Thus, organizations delay investments into augmenting their capacity unless unavoidable.
This way, they can reduce the costs associated with over-capacity and save substantial sums. This strategy works well for smaller firms that don’t have extra money to invest beforehand.
The caveat here is that organizations must clearly understand their demand patterns and the capacity required to meet them. Successful execution of the lag strategy requires careful monitoring and management of inventory levels.
Lead Strategy
The lead capacity management strategy involves having the necessary resources to manage future demand. This strategy works well when there are surges in demand. However, it’s cost-intensive and works well for larger organizations with the financial resources to maintain additional resources in anticipation of future demand.
Match Strategy
The match capacity planning strategy uses a mix of lead and lag strategies. Organizations must assess market trends and the demand for their products or services to successfully leverage the match strategy.
Types of Capacity Planning
Here’s a rundown of the different types of capacity planning:
Production Capacity Planning
Production capacity planning helps determine the quantum of products or services an organization can manufacture or offer in a given period. Organizations conduct such an assessment after analyzing the available resources like the workforce, materials, technology and tools.
For instance, a VMC machine tool can produce 200 dyes in 8 working hours. However, production capacity planning must also consider the time required for shift changes and breaks to calculate the genuine production capacity.
Workforce Capacity Planning
Workforce capacity planning enables organizations to assess how many employees it requires to meet product or service demand. Organizations factor in scheduling, skill levels and staff availability to evaluate their workforce capacity. This process helps understand staffing needs and decide on whether to hire, upskill or streamline human resources.
Financial Capacity Planning
Financial capacity planning considers elements like capital and operational expenditure and revenue projections to evaluate the financial resources needed to enable the delivery of a product or service. Organizations conduct financial capacity planning to determine whether or not they need to raise capital or streamline financial resources. This way, they don’t face any resource crunch.
Steps in the Capacity Planning Process
Now that we understand the importance of capacity planning, let’s take a look at a framework to conduct it. Every organization has unique resources, constraints and business opportunities. Therefore, the process of capacity planning would differ across organizations.
Mentioned below is a standard process for a capacity planning exercise.
Step 1: Understand Business Requirements
In the first step, organizations must assess their business requirements. Here, they need to examine their past growth and the demand for their products or services. Then, they must evaluate their growth prospects by factoring in historical data, growth projections and market trends. This way, decision-makers can evaluate their current and future business requirements.
Step 2: Zero In on Resources
Here, organizations need to identify the resources they have and need to address the existing and future demand for their products or services. Resources could include software, human resources, time or a production facility needed to manage demand.
Step 3: Assess the Current Capacity
After identifying the resources, organizations need to determine their current capacity. In this step, they need to assess whether or not their resources are under or over-utilized. Plus, they need to evaluate whether their available resources limit their ability to manage future demand.
Step 4: Perform Demand Forecasting
In this step, organizations must analyze the projects in their sales pipeline to identify the required resources if the deals materialize.
To sum up, they need to assess whether or not:
- They need to hire new workers with different skill sets. And if they need to onboard full-time, part-time, or contractual employees.
- They would be able to upskill their existing human resources.
- They have the technology platforms and tools to enable their employees to offer their clients the desired products or services.
This assessment helps prepare organizations for the next step.
Step 5: Develop a Plan for Additional Capacity
Now, organizations need to translate the requirement for more capacity into tractable projections.
For example, they may consider hiring more employees or upskilling them. Or bring in new technology capabilities like doing away with point systems or manual processes and using a unified solution. In most cases, organizations would need to address all the above-mentioned issues to optimally manage the need for additional capacity.
Step 6: Assess the Risks
Organizations must create a full-scale risk assessment plan before commencing with the findings. This assessment includes weighing the risks of missing milestones and not fulfilling the project within the timeline. Also, whether or not the workforce will experience burnout due to workload, the cost of hiring new resources, and the impact of attrition.
Plus, they must assess the opportunity costs of situations where they can’t manage the demand due to the lack of capacity, especially during surges.
Step 7: Monitor and Tweak the Capacity Plan
In this final step, organizations need to remain vigilant while implementing their capacity plan. It’s important to note that no capacity planning exercise is fool-proof. It’s open to adjustments depending on the resource utilization levels. Hence, organizations must constantly monitor their capacity plan and adjust accordingly to ensure it remains effective in the longer run.
The impact of capacity planning on scaling your organization reflects in the form of insights into the required increase in the number of workers, new profiles, and changes in business processes. Also, it provides a stipulative idea of how your future resources will be required based on the growth projections.
Without proper capacity planning, there are chances of misallocating workload, getting a false idea of workflow progress, employee dissatisfaction, and heavy losses. It’s noteworthy that capacity planning is performed intuitively by all members of any organization. However, a scientific approach helps track activities tractable, enabling the management to make better and more informed business decisions.
Capacity Planning vs. Resource Planning
While people use resource planning and capacity planning interchangeably, they have distinct aims and processes. For example, capacity planning evaluates future projects an organization can work on. On the other hand, resource planning is more oriented toward analyzing the progress of ongoing projects.
Capacity planning has a longer horizon and involves a higher-level understanding of how the organization would accurately predict its resource requirements. On the contrary, resource planning considers immediate and mid-term requirements. However, the projections are comprehensive.
That capacity planning requires focusing on qualitative parameters such as skills and collective efforts is one critical differentiator between the two. On the other side, organizations only need to weigh quantitative factors like working hours and headcount in the case of resource planning. Thus, organizations undertake capacity planning to match demand and supply.
Likewise, they can undertake resource planning to minimize the difference between the current utilization rate of resources and their ideal utilization rate.
Capacity Planning vs. Resource Planning: A Snapshot
| Capacity Planning | Resource Planning |
|---|---|
| Suitable to evaluate future projects | Suitable for immediate and mid-term requirements |
| Has a high-level, macro analysis approach | Has a micro-analysis approach with comprehensive projections |
| Helps plan how much/many resources are required | Helps plan how resources will be used |
| Focuses on qualitative factors such as skills and collective efforts to match demand and supply | Focuses on quantitative factors like working hours and headcount. Can be done to keep the resource utilization rate in check |
Organizations should invest in improving their capacity planning capabilities to drive higher efficiencies. A good place to begin would be investing in technology platforms and tools that automate processes and offer real-time information to make informed decisions.
Frequently Asked Questions
1. What are the steps in capacity planning?
Capacity planning involves the following steps:
A. Understand business requirements
B. Zero in on resources
C. Assess the current capacity
D. Perform demand forecasting
E. Develop a plan for additional capacity
F. Assess the risks
G. Monitor and tweak the capacity plan
2. What is the goal of capacity planning?
Capacity planning helps businesses ensure that they always have adequate resources to service demand. Here, resources include people with the right skill set, processes, technology and time. Organizations examine historical data, growth projections and market trends to determine their capacity to adequately meet future demand.
3. What are the 4 types of capacity planning?
There are several types of capacity planning, including:
- Financial capacity planning
- Workforce capacity planning
- Production capacity planning
- Project capacity planning
ABOUT THE AUTHOR
Shashank Shekhar
Shashank Shekhar has been a Senior Marketing Communications Specialist for over 9 years. He specializes in writing about technology trends like Artificial Intelligence (AI) and machine learning (ML) and their impact on shaping the project management landscape with tools like professional services automation solutions and time-tracking solutions. Outside of work, he loves reading about history, astrophysics and geopolitics.