Short-Term Capacity Planning: Strategies and Management

Introduction to Capacity Planning

Capacity planning has received increased emphasis in recent years due to the financial benefits of using capacity plans efficiently within material requirements. This is particularly true as international competitors are adopting more efficient and productive means of managing their own capacity. Toyota is a prime example of how short-term capacity management can be used to improve profitability, shareholder return, and cost control. Insufficient capacity can quickly lead to deteriorating delivery performance, unnecessarily increase work-in-process inventory, and frustrate both sales personnel and those in manufacturing. Frustrated customers often elect to purchase a competitor's product when their preferred product is unavailable. This dynamic helps explain why American consumers turned to Japanese automobiles — attracted by their high quality and value — rather than domestic alternatives.

However, excess capacity can be equally costly and unnecessary. The housing sector illustrated this concept clearly: excess production created a large inventory surplus that had to be absorbed before new construction could resume. With so much supply available, pricing and home values declined sharply. The inability to properly manage capacity can therefore be a significant barrier to achieving maximum firm performance. In addition, capacity is an important factor in an organization's choice of technology.

Defining Capacity and Its Measurement

Capacity is generally understood to mean the maximum rate at which a transformation system produces or processes inputs. In some cases, this rate may effectively be "all at once" — as with the seating capacity of an airplane. A more practical definition of capacity is the volume of output per elapsed time and the production capability of a facility. Returning to the automotive example, capacity could be defined as the number of cars produced over a given period of time. The production capacity of a facility would therefore be the maximum number of cars that facility can produce.

Having a strong understanding of these figures is critical. A facility approaching its maximum capacity may need upgrades or enhancements to meet demand. Conversely, during periods of economic pessimism, operating at maximum capacity could mean a firm is producing goods for which there is little or no demand. Capacity management is critical in this regard because fixed costs are a major determinant of success or failure for a business.

Factors Affecting Capacity and Short-Term Planning

Capacity planning is the process used to determine how much capacity is needed in order to manufacture greater quantities of a product or to begin production of a new one. A number of factors can affect capacity, many of which are within the company's or management's control. Examples relevant to capacity management include the number of workers, worker skill levels, number of machines, waste, scrap, defects, errors, productivity, supplier reliability, government regulations, and preventive maintenance schedules.

In many instances, short-term process improvements can positively affect all of the above. Short-term capacity management can help reduce waste by making production more efficient. It can reduce defects through the application of Lean Six Sigma and other process improvement methodologies. Productivity can be improved by granting workers greater autonomy within the process. Toyota, for instance, allowed any worker on the assembly line to stop the process upon identifying a defect in a product or system. This approach to short-term capacity management ultimately enabled workers to produce higher-quality, more consistent merchandise. Capacity planning is relevant in both the long-term and the short-term, though the issues at stake differ for each.

Short-Term Capacity Planning in Practice

Capacity decisions are frequently required in short-term situations across a variety of industries. In a grocery store, the number of customers needing to check out at any given point during the day can vary significantly. To provide good customer service, managers must ensure that sufficient cash registers and employees are on hand to meet checkout demand at all times.

Similarly, hotels must ensure they have enough employees to register arriving guests, clean rooms, and provide food and beverage service. These staffing decisions must be made carefully to avoid excessive labor costs that result from having more employees available than the volume of customers requires.

The first task of any capacity management team is to identify what capacity management work is already being carried out. In large organizations, separate teams may be handling capacity planning for servers, networks, and mainframes. The capacity management team needs to document existing procedures and inventory the tools and monitoring systems already in use. Identifying early on the skills required to carry out effective capacity management is equally important.

A key element of capacity management is determining the service level requirements of the business. It is essential to identify which systems perform which functions and to quantify users' expectations regarding how that work is accomplished. From this baseline, analysts can evaluate the current capacity of existing systems, assess how well those systems meet user needs, and determine whether capacity should be reduced in some areas or expanded in others.

In the short-term, capacity planning addresses issues of scheduling, labor shifts, and balancing resource capacities. The goal is to handle unexpected shifts in demand in an efficient and economical manner. Such shifts can occur for a wide range of reasons. A primary concern in many industries is the effect of interest rates and monetary policy. Returning to the automotive example: if interest rates rise suddenly, purchasing a car becomes more expensive. Consumers facing stagnant wages may choose not to buy, leading to overproduction, price pressure, and inventory buildup. Producers must therefore be attentive to the impact of interest rate changes on demand for their products.

Technological change represents another source of unexpected demand shifts. While Toyota's process innovations improved quality and efficiency, the emergence of alternative-energy vehicles has posed a challenge to traditional automakers. Tesla and other electric vehicle manufacturers are reducing demand for conventional gasoline-powered vehicles. Environmental advocacy is also shaping consumer behavior in ways that can lead to increased compliance costs, lower demand, and higher rates of supplier default. Short-term capacity managers must remain alert to sudden shifts in consumer sentiment and purchasing behavior. Undetected behavioral shifts can lead to costly production errors — as was seen in 2008, when broader economic deterioration drove sharp declines in automotive demand. The time frame for short-term capacity planning is frequently only a few days but may extend to as long as six months.

References

Cochran, Jeffery K., and Alberto Marquez Uribe. "A Set Covering Formulation for Agile Capacity Planning Within Supply Chains." International Journal of Production Economics 95, no. 2 (2005): 139–149.

Jonsson, Patrik, and Stig-Arne Mattsson. "Use and Applicability of Capacity Planning Methods." Production and Inventory Management Journal 43, no. 3–4 (2002): 89–95.

Meredith, Jack R., and Scott M. Shafer. Operations Management for MBAs. 2nd ed. New York: John Wiley and Sons, Inc., 2002.

Vollmann, Thomas E., William L. Berry, D. Clay Whybark, and Robert F. Jacobs. Manufacturing Planning and Control Systems. Boston: McGraw-Hill, 2005.