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Capacity Planning Definition. Let’s discuss its essence.

What is Capacity Planning?
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Capacity Planning Definition. Let's ...

Capacity Planning is the process of determining the company resources needed by an organization to meet changing demands for its products. This article explains the basics of Capacity Planning with focusing on its essence. Relating to ‘Capacity’, it also introduces TOC (Theory Of Constraint).

(Duration: 8:18)

Capacity Planning Definition

Hi, this is Mike Negami, Lean Sigma Black Belt.

I received this request this time.

Capacity Planning Video Request

“Could you make a Capacity Planning video in machining cell for both man and machines?”

Thank you, Neo for your request.

‘Capacity Planning’, which you may be hearing it for the first time, nowadays is used not only in the manufacturing industry, but in many industries.

So, what is it? Let’s check Wikipedia’s definition.

Wiki's Definition of Capacity Planning

“Capacity Planning is the process of determining the production capacity needed by an organization to meet changing demands for its products.”

Wikipedia in English: Capacity Planning

As I mentioned, it’s used not only in manufacturing, it’s also used as a strategic method. ‘Company resources’ is a more appropriate term than ‘production capacity’.

Therefore, that statement should read “Capacity Planning is the process of determining the company resources needed by an organization to meet changing demands for its products.”

In the IT industry, people use this term as a synonym for ‘Capacity Management’ and it’s a method for making the quantity and quality of an enterprise’s IT resources meet the demand.

Although the principle is the same, applications vary among industries and its subject content is broad. Many algorithms and software have been developed.

Furthermore, it’s explained in many ways depending on the speakers, so many people are confused by this.  For today, I’ll talk about only the essence of Capacity Planning.

Types of Capacity Planning

First of all, it’s divided into ‘Long-term Capacity Planning’ and ‘Short-term Capacity Planning’ depending on your target subject.

Long-term Capacity Planning

The goal of ‘Long-term Capacity Planning’ is to keep meeting the demand of your products for a long term of more than one year.  The IT investment, other capital investment, securing necessary human resources and large process improvement projects all belong to this category.

In the long-term, uncertainty increases and when such plans fail, the damage is significant, so forecasting and decision making become very difficult. ‘Long-term Capacity Planning’ helps us increase the probability of success.

Short-term Capacity Planning

On the other hand, ‘Short-term Capacity Planning’ is used for more daily operations such as personnel and machine scheduling and maintaining proper inventory, etc.

Today’s request, ‘Capacity Planning in machining cell for both man and machines” belongs to ‘Short-term Capacity Planning’.

The basic steps of Capacity Planning

Next are the basic procedures of Capacity Planning.

1) Among a number of company resources, identify target company resources, which are important to satisfy product demands, and understand your current resources’ capacities.

2) Monitor trends, and forecast future demands.

3) Locate and manage necessary resources effectively.

Then, it’s very important to repeat Steps 1 to 3.

1) Identify target company resources and understand your current resources’ capacities.

Here are common company resources that would be targeted in Step 1.

Common Company Resources

Found on the Portsmouth Research Portal

a) Product or service mix: Necessary resources would change depending on what your company produces.

b) Employees and their skill levels: Secure necessary skilled employees. In order to respond to changes in demand, it’s important to conduct cross training regularly to your employees so that they can be in charge of many different tasks.

c) IT equipment and technology: IoT and AI especially will dramatically increase productivity in the future, so we need to keep researching about them.

d) Raw materials and availability: Your supply may stop due to disasters. Risk management and effort to develop better suppliers are necessary.

The last three resources are ‘Working schedule’, ‘Production lines and business processes’ and ‘Capacity of factories and warehouses’ are big parts of Capacity Planning.

TOC (Theory Of Constraint)

When you talk about resources and capacity, there is one very important theory: that is the TOC (Theory Of Constraint) that Eliyahu Goldratt created.

The main point of TOC is that the overall processing capacity is equal to the resource with the lowest processing capacity. We call that resource a bottleneck.

It’s a method to realize organization optimization by eliminating the bottleneck. Since TOC is a very interesting topic, I’ll make a video about it.

In Capacity Planning, if your processes have many bottlenecks, you cannot proceed to the next step.

2) Monitor trends, and forecast future demands.

Another important thing is that it’s not good if you have too many resources. The more resources you have, the more it costs. Therefore, you don’t want unnecessary resources.

Conversely, what happens if you run out of resources? We can’t meet customers’ demands and will have loss in sales. Moreover, we may lose future sales because of getting a bad reputation.

Therefore, we want to prepare just the right amount of resources to satisfy customer demand. That requires accurate demand forecasting.  So, the next step is to “Monitor trends, and forecast future demands.”

Capacity Management

However, while no one can predict the future, there are many algorithms and software to forecast demand. You have to find something that fits your company’s situation.

I also developed an algorithm to apply the Kanban System concept to regular inventory control. I talk about that in the video with the link below so please refer to it.

3) Locate and manage necessary resources effectively.

At the beginning, at least try to anticipate future sales from past sales. After forecasting, the last step is “Locate and manage necessary resources effectively”.

The difficulty here is that all resources have different capacities. For example, let’s assume that sales will increase 1.5 times, it’s not enough to just increase all resources 1.5 times.

Depending on the capacity of each resource, and the way that you achieve overall optimization, we have to develop a system that enables us to set all resources in the right places and right amounts.

Capacity Planning has a long history and variety of contents. I couldn’t make a video that you can use immediately in practice, but I’m happy if you think that you could understand Capability Planning a little better.

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