case study capacity planning

Before you read the 3 Examples of Capacity Planning, you should read the first part of this article that broke down Capacity Planning in 10 Steps here: https://www.workclout.com/post/10-steps-to-create-apply-capacity-planning-for-manufacturing If you have read it already, read on! Capacity planning and techniques will function differently depending on production mode.  Practical examples of models in capacity planning for different production modes include: ‍

1. Make to Stock (MTS)

Make to Stock is common within discreet manufacturing and process manufacturing.  As these operations often have complex multi-level BOMs, capacity planning must include planning for sub-processes required to produce components or assemblies for final construction.  An example of this would be a production facility where single serve meal or snack kits are produced.   ‍

With each kit consisting of meat, cheese, bread and juice, a complex BOM is required to facilitate production of each.  This would include the individual food types as well as tray formation and wrapping.  It is also possible that these facilities would use a combination of in-house production for some parts of the kit and sub-contracted sourcing for others.   ‍

The complexity of the final product as well as the changing nature of the foods offered requires accurate BOMs, concise measurements of labor and machine capacity and the ability to changeover quickly and often.  Companies with MRP systems in place could use Capacity Requirements Planning (CRP) that relies on MRP inputs and inventory to produce a capacity plan.   ‍

This type of operation could also use the rough-cut planning system of Capacity Planning Using Overall Factors, where production standards and the master schedule are used to develop a capacity plan.  MTS production facilities would need to make full use of all ten steps above to develop accurate and actionable capacity plans. ‍

2. Make to Order (MTO)

By nature, make to order production modes will require less WIP and fewer processes.  However, they still rely on repeatable BOM structures to produce units higher in cost, or that are not commodified or consumable goods.  An example of this type of manufacturing would be a facility that produces coffee makers.  With a specific product line with less BOM levels, production can be triggered by the actual order itself rather than producing to maintain a stock level for consumables.   ‍ In this mode, a factory may choose to utilize to use a rough-cut capacity planning method such as capacity bills or resource profiles.  In capacity bills, the BOM and routing sheet is used to show the sequence or work center required for production along with the setup and run time.  For an MTO utilizing resource bills, the same variables are used as in capacity bills but with lead time for product included in so workloads can be planned on a time scale.   ‍

MTO environments may contain sub-process production for key components and assemblies, but in the case of the example of the coffee maker manufacturer, they would also require a high degree of assembly for the final product.  An MTO manufacturer would need to have tight control of its process routing and a deep understanding of resource capacity and resource utilization. ‍

3. Engineer to Order (ETO)

In an engineer to order production system, each unit is a unique iteration of a product.  And while a BOM may be developed to guide the construction and assembly, it is usually a single level BOM or one with fewer levels.  As the calculations for workloads, work centers and resource capacity must be calculated at each order, a rough-cut method such as capacity bills would be most effective in capacity planning.   ‍ An example of this type of manufacturing would be a factory that produces luxury limousines.  As each finished unit is a unique iteration, the factors for each unit would need to be added together to develop a capacity plan.   ‍

Using the ten steps above, key considerations for an ETO would be in the establishment of a workload and in the document of equipment capabilities.   ‍ In the case of the limo manufacturer, while standards cannot be developed for common products as each unit is a one-off, an accurate understanding of welder capacity, paint booth dwell time and other key functions along the line may be more important to an ETO than would some other steps in determining capacity. ‍

If you want a free consultation on how to approach capacity planning at your factory, feel free to book a time with a capacity planning expert here: https://meetings.hubspot.com/workclout/free-30-min-supply-chain-consultation

• Become A Partner
• How It Works
• Template Marketplace
• Enterprise Download

Lean Six Sigma Training Certification

• Facebook Instagram Twitter LinkedIn YouTube
• (877) 497-4462

What is Capacity Planning? Types, Strategies & Best Practices

April 3rd, 2024

Effective capacity planning plays in the success of any organization, regardless of its size or industry.

Capacity planning is all about figuring out how much work your organization can handle, whether producing goods or delivering services, to meet the demands of your customers.

It’s like planning how many ingredients you’ll need to bake a cake – you don’t want to run out halfway through!

Without it, businesses risk falling short of demand, resulting in missed opportunities, dissatisfied customers, and ultimately, a loss of revenue.

Where agility and responsiveness are paramount, capacity planning has become an indispensable component of operational excellence . 

By accurately forecasting demand and proactively managing resources, organizations can optimize their operations, minimize waste, and maximize profitability.

Key Highlights

• Understand the fundamental concepts of capacity planning, including strategic resource planning, and supply and demand dynamics.
• Differentiate between capacity planning and resource planning, 
• Explore its three primary types: workforce capacity planning, tool capacity planning, and product capacity planning.
• Recognize its critical importance for businesses.
• Learn the three capacity planning strategies: lead strategy, lag strategy, and match strategy.
• Master the step-by-step process, from forecasting demand and determining required capacity to calculating current capacity, and identifying gaps.
• Gain insights into the latest capacity planning software and resource management tools.

What is Capacity Planning? Strategies, Types, and Processes

Capacity planning is a strategic process that aligns an organization’s available resources with its projected demand. 

It involves a comprehensive analysis of an organization’s workforce, tools, and production capabilities to ensure that the right resources are available at the right time to meet customer requirements. 

Strategic Resource Planning

Capacity planning falls under the broader umbrella of strategic resource planning, which encompasses the proactive management of an organization’s resources to achieve its long-term goals and objectives. 

By continuously monitoring and adjusting resource allocation, businesses can maintain a competitive edge and respond quickly to changes in market dynamics, customer demands, and industry trends.

Supply and Demand

The fundamental principle behind capacity planning revolves around the delicate balance between supply and demand. 

On one side, demand represents the products or services that customers require, driven by market forces, seasonal fluctuations, and emerging trends. 

On the other side, supply refers to the resources an organization possesses, including its workforce, tools, equipment, and raw materials..

Lead Capacity Planning

It is a proactive strategy that involves increasing production capacity in anticipation of higher demand. 

This approach is particularly beneficial for organizations that experience predictable seasonal fluctuations or can accurately forecast future demand based on market trends and historical data. 

Lag Strategy Planning

In contrast, lag strategy planning involves increasing production capacity only when a real-time increase in demand is observed. 

This reactive approach is often employed in industries where demand patterns are unpredictable or highly dynamic, such as healthcare or emergency services. 

Match Strategy Planning

The match strategy planning approach combines the strengths of both lead and lag strategies, offering a balanced and dynamic solution to capacity planning.

This strategy involves continuously monitoring actual demand, market trends, and forecasts, and adjusting capacity incrementally to match the observed patterns. 

Capacity Planning vs. Resource Planning

There is often a lack of clarity regarding the distinction between capacity planning and resource planning. 

While these two concepts are closely intertwined, it is crucial to understand their fundamental differences to ensure effective operational planning and execution. 

Capacity Planning Definition

Capacity planning is a strategic, forward-looking process that aims to align an organization’s resources with its projected demand. 

It involves a comprehensive analysis of workforce capabilities, tool availability, and production capacities to ensure that the right resources are in place to meet future customer requirements. 

Resource Planning Definition

Resource planning, on the other hand, is a more tactical and short-term endeavor. It focuses on the efficient allocation and utilization of existing resources within an organization. 

Resource planning involves assigning specific tasks and projects to available resources, taking into account their skills, availability, and workload. The primary objective of resource planning is to maximize the productivity and efficiency of an organization’s current resource pool, ensuring that tasks are completed on time and within budget. 

Key Differences

While capacity planning and resource planning are complementary processes, they differ in several key aspects:

• Scope : Capacity planning takes a strategic, organization-wide view, considering the overall resource landscape and future demand. Resource planning, on the other hand, is more focused on the tactical allocation of specific resources to individual tasks or projects.
• Time Horizon: Capacity planning is a long-term endeavor, often spanning months or years, as it involves forecasting future demand and adjusting resource levels accordingly. Resource planning, however, typically operates on a shorter time horizon, dealing with the allocation of existing resources over weeks or months.
• Objective : The primary objective of capacity planning is to ensure that an organization has the necessary resources to meet projected demand, enabling growth and maintaining a competitive edge. Resource planning, on the other hand, aims to maximize the efficiency and productivity of an organization’s current resource pool.
• Resource Types : Capacity planning considers a broad range of resources, including workforce, tools, equipment, and raw materials. Resource planning, while encompassing these elements, often focuses primarily on the allocation of human resources and their associated skills and availability.

By understanding the distinct roles and objectives of both, organizations can develop a comprehensive strategy that incorporates both processes, enabling them to proactively manage their resource landscape while ensuring efficient utilization of existing resources.

Types of Capacity Planning

To ensure that businesses can navigate its complexities and achieve sustainable success, it is essential to have a comprehensive grasp of the three primary types: workforce, tool, and product capacity planning. 

Workforce Capacity Planning

It is arguably the most critical component of the capacity planning process, as it directly impacts an organization’s ability to deliver its products or services. 

This type of planning involves a thorough analysis of an organization’s human resources, including their skills, availability, and workload. 

The objective is to ensure that the right individuals with the appropriate expertise are assigned to the right tasks at the right time, while also preventing burnout and maintaining a healthy work-life balance.

Tool Capacity Planning

The availability and utilization of tools and equipment play a crucial role in an organization’s ability to meet customer demand. Tool capacity planning involves a comprehensive assessment of the tools, machinery, and equipment required to support an organization’s operations. 

This type of planning is particularly critical in industries such as manufacturing, construction, and engineering, where specialized tools and equipment are essential for production or project execution.

Product Capacity Planning

It is primarily applicable to organizations that produce physical goods or products. 

This type of planning involves a detailed analysis of the raw materials, components, and resources required to manufacture or assemble products to meet customer demand. 

In industries such as retail, e-commerce, and manufacturing, product capacity planning is essential for ensuring that sufficient inventory levels are maintained to satisfy customer orders and avoid stock-outs.

By recognizing and addressing the unique challenges and requirements of each type of capacity planning, organizations can develop a comprehensive strategy that ensures the efficient allocation and utilization of resources. 

Enabling them to meet customer demand, maintain competitive advantage, and drive sustainable growth.

Why is Capacity Planning Important for Businesses?

Effective capacity planning can have a transformative impact on an organization’s success. 

Where customer expectations are constantly evolving, and market conditions are subject to rapid change, the ability to align resources with demand is no longer a luxury but a necessity for survival and growth.

Key Benefits of Capacity Planning

Implementing a robust capacity planning strategy can yield a multitude of benefits for businesses, including:

On-time Project Delivery

By accurately forecasting resource requirements and ensuring the availability of the necessary workforce, tools, and materials, capacity planning enables organizations to deliver projects on time, meet customer expectations, and foster long-term relationships built on trust and reliability.

Cost Reduction 

It helps organizations optimize resource utilization, minimizing waste and unnecessary expenditures. 

By aligning resource allocation with demand, businesses can avoid the costly implications of excess inventory, underutilized personnel, or idle equipment.

Resource Utilization 

Through capacity planning, organizations can maximize the productivity and efficiency of their resources, ensuring that they are utilized to their full potential. 

This not only enhances operational performance but also contributes to increased profitability and a competitive advantage.

Skill Management

It enables businesses to identify and address skill gaps within their workforce, facilitating targeted training and development initiatives. 

By ensuring that the right skills are available when needed, organizations can maintain a competitive edge and adapt to evolving market demands.

Employee Retention

By proactively managing resource allocation and workloads, capacity planning helps to prevent employee burnout and foster a positive work-life balance. 

This, in turn, contributes to increased job satisfaction, improved morale, and lower employee turnover rates, ultimately enhancing productivity and preserving institutional knowledge.

Impact on Business Operations

The benefits of capacity planning extend beyond individual projects or departments, permeating throughout various aspects of an organization’s operations:

Project Management

Capacity planning is an integral component of effective project management , ensuring that project timelines are realistic, resource requirements are adequately addressed, and potential bottlenecks are identified and mitigated proactively.

Supply Chain Management

By aligning production capacity with customer demand, capacity planning enables organizations to optimize their supply chain operations, reducing lead times, minimizing inventory costs, and enhancing overall supply chain efficiency.

Production Planning

In manufacturing environments, capacity planning plays a crucial role in optimizing production schedules, ensuring that the right resources are available at the right time to meet customer orders and minimize downtime or production delays.

Resource Allocation

Capacity planning is about effective resource allocation, ensuring that the right resources – whether human, technological, or material – are allocated to the right tasks at the right time, maximizing productivity and efficiency across the organization.

By recognizing the critical importance of capacity planning and implementing a comprehensive strategy tailored to their specific needs, businesses can unlock a multitude of benefits,

Capacity Planning Strategies

While its fundamental principles remain consistent across industries, the specific strategies employed must be carefully tailored to the unique characteristics and demands of each business. 

In my experience, three primary capacity planning strategies have proven to be effective in various contexts: the lead strategy, the lag strategy, and the match strategy.

Lead Strategy

Anticipating Demand

The lead strategy is a proactive approach to capacity planning that involves increasing production capacity in anticipation of higher demand. 

This strategy is particularly well-suited for organizations that operate in industries with predictable seasonal fluctuations or those that can accurately forecast future demand based on market trends and historical data.

By proactively scaling up resources, such as workforce, tools, and raw materials, businesses employing the lead strategy can position themselves to respond swiftly to increased demand, minimizing the risk of missed opportunities or customer dissatisfaction.

Examples and Use Cases

One of the most notable examples of the lead strategy in action can be observed in the retail industry, particularly during the holiday season. 

Retailers often anticipate a surge in consumer demand and prepare by increasing their workforce through seasonal hiring, securing additional inventory from suppliers, and ensuring that their distribution and logistics networks are primed to handle the increased volume.

Similarly, in the manufacturing sector, companies may ramp up production capacity in advance of anticipated spikes in demand, stockpiling finished goods or raw materials to ensure a seamless supply chain and uninterrupted delivery to customers.

Lag Strategy

Responding to Real-time Demand In contrast to the proactive nature of the lead strategy, the lag strategy is a reactive approach that involves increasing production capacity only when a real-time increase in demand is observed. 

This strategy is often employed in industries where demand patterns are unpredictable or highly dynamic, such as healthcare or emergency services.

While the lag strategy may reduce the risk of underutilized resources, it can also result in delays and potential customer dissatisfaction if demand surges unexpectedly, as the organization scrambles to acquire and allocate the necessary resources.

The lag strategy is commonly employed in industries where responsiveness to real-time demand is paramount. 

For instance, in the healthcare sector, hospitals and emergency services may rely on a pool of on-call personnel who can be rapidly deployed in response to surges in patient volumes or emergencies.

Similarly, in the service industry, companies may maintain a flexible workforce that can be rapidly scaled up or down based on fluctuations in customer demand, ensuring that resources are allocated efficiently and effectively in real time.

Match Strategy

Combining Lead and Lag

The match strategy represents a balanced and dynamic approach to capacity planning, combining elements of both the lead and lag strategies. 

This strategy involves continuously monitoring actual demand, market trends, and forecasts, and adjusting capacity incrementally to match the observed patterns.

By employing a match strategy, organizations can maintain a responsive and agile approach while minimizing the risks associated with excess capacity or resource shortages.

Dynamic Capacity Adjustment

A key advantage of the match strategy is its ability to adapt to rapidly changing market conditions and demand patterns. 

Through continuous monitoring and data-driven decision-making, businesses can dynamically adjust their capacity levels, scaling up or down as necessary to ensure an optimal balance between resource availability and customer demand.

This dynamic adjustment capability is particularly valuable in industries characterized by rapidly evolving market trends, disruptive technologies, or unpredictable consumer behavior, where the ability to respond swiftly to changing conditions can mean the difference between success and failure.

By carefully evaluating the unique characteristics of their industry, market dynamics, and customer expectations, organizations can select the capacity planning strategy that best aligns with their goals and requirements.

The Capacity Planning Process: A Step-by-Step Guide

To truly harness the power of capacity planning and unlock its full potential, organizations must embrace a structured and disciplined approach that seamlessly integrates with their overall business strategy and operational processes. 

Forecasting Demand

The first step is to accurately forecast the anticipated demand for your products or services. 

This involves a thorough analysis of various factors, including

Analyzing Historical Data

By examining past sales data, production records, and customer order patterns, organizations can identify trends and cyclical patterns that can inform future demand projections.

Market Trends and Seasonality

It is essential to stay attuned to broader market trends, industry dynamics, and seasonal fluctuations that may influence customer demand. 

This may involve monitoring economic indicators, consumer behavior, and competitive landscape analysis.

Determining Required Capacity

Once you have a solid understanding of the anticipated demand, the next step is to determine the required capacity to meet that demand. 

This involves:

Estimating Resource Needs

Based on the forecasted demand, organizations must estimate the necessary resources, including workforce, tools, equipment, and raw materials, required to fulfill that demand effectively.

Critical Path Analysis

In complex projects or production processes, it is vital to identify the critical path – the sequence of interdependent tasks that determines the overall project duration. 

By analyzing the critical path, organizations can pinpoint potential bottlenecks and allocate resources accordingly.

Calculating Current Capacity

With a clear understanding of the required capacity, the next step is to evaluate your organization’s current capacity levels. This involves

Resource Availability 

Assessing the availability of existing resources, including the number of skilled personnel, operational equipment, and raw material inventories.

Utilization Rates 

Analyzing the current utilization rates of available resources to identify potential areas of underutilization or overutilization can inform capacity optimization efforts.

Identifying Capacity Gaps

By comparing the required capacity with the current capacity, organizations can identify potential capacity gaps, which may manifest as:

Excess Capacity 

A situation where the available resources exceed the requirements, potentially leading to inefficiencies and increased costs.

Capacity Shortage

A scenario where the available resources are insufficient to meet the projected demand, potentially resulting in missed opportunities, delays, or customer dissatisfaction.

Aligning Capacity and Demand

The final step in the capacity planning process is to take corrective actions to align capacity with demand effectively. This may involve:

Strategically allocating available resources to priority areas, projects, or processes to maximize efficiency and minimize bottlenecks.

Capacity Planning Tools

Leveraging specialized software or tools to model various scenarios, optimize resource allocation, and continuously monitor and adjust capacity levels in response to changing conditions.

By following this structured and iterative approach, organizations can effectively navigate the complexities of capacity planning, ensuring that they have the right resources in place to meet customer demand. 

Capacity Planning Best Practices and Tools

It is crucial to recognize that capacity planning is not a one-size-fits-all endeavor. 

To truly unlock the full potential of this strategic process, organizations must adopt a tailored approach that takes into account their unique business needs, industry dynamics, and operational complexities.

Cross-Functional Collaboration

Effective capacity planning requires a concerted effort that transcends departmental silos and fosters collaboration across various functional areas within an organization. 

To this end, it is essential to establish a dedicated capacity planning team comprising representatives from key stakeholder groups, such as operations, finance, sales, and human resources.

This cross-functional team can leverage the collective expertise and insights of its members, ensuring that capacity planning decisions are informed by a comprehensive understanding of the organization’s goals, constraints, and operational realities.

Prioritizing Projects

In an environment where resources are finite, organizations must prioritize their strategic importance and potential return on investment (ROI). 

By aligning its efforts with high-impact, high-value initiatives, businesses can maximize resource utilization and ensure that critical projects receive the necessary support and resources.

This prioritization process should take into account factors such as revenue potential, customer demand, competitive positioning, and long-term strategic objectives, enabling organizations to make informed decisions that drive sustainable growth and profitability.

Continuous Monitoring

Capacity planning is not a static endeavor; it requires continuous monitoring and adjustment to ensure alignment with evolving market conditions and organizational priorities. 

To facilitate this ongoing process, it is essential to establish a robust framework for tracking key performance indicators (KPIs) and metrics related to capacity utilization, resource availability, and project performance.

By regularly analyzing these metrics, organizations can identify potential bottlenecks, inefficiencies, or capacity gaps, and take proactive measures to address them, ensuring that resources are optimally allocated and utilized.

Capacity Planning Software

Resource Management Tools

Organizations can leverage a wide array of specialized capacity planning software and resource management tools to streamline and optimize their capacity planning processes. 

These tools often incorporate advanced analytics capabilities, enabling organizations to model various scenarios, visualize resource utilization, and make data-driven decisions regarding resource allocation and capacity optimization.

Scenario Planning

One of the key advantages of capacity planning software is its ability to facilitate scenario planning. 

By inputting various assumptions and variables, such as demand forecasts, resource availability, and project timelines, organizations can simulate multiple scenarios and evaluate the potential impact on capacity levels.

This capability empowers decision-makers to proactively identify potential risks or opportunities and take corrective actions before issues arise, enhancing the overall agility and resilience of the organization.

Integration with Other Systems

Project Management Software

To maximize the effectiveness of these efforts, it is essential to integrate capacity planning processes with other core business systems, such as project management software. 

By seamlessly integrating the data with project schedules, resource assignments, and task dependencies, organizations can ensure that capacity planning decisions are directly aligned with project execution, minimizing the risk of resource conflicts or capacity constraints.

ERP and Supply Chain Systems

For organizations operating in manufacturing or supply chain-intensive industries, integrating capacity planning with Enterprise Resource Planning (ERP) and supply chain management systems is crucial. 

This integration enables real-time visibility into inventory levels, material requirements, and supply chain dynamics, allowing for more accurate capacity forecasting and resource allocation decisions.

Parting Notes

As I reflect on the insights and best practices shared, I am reminded of the immense value that effective capacity planning can bring to organizations across industries. 

By aligning resources with demand, optimizing utilization, and fostering agility, capacity planning serves as a cornerstone for operational excellence, enabling businesses to navigate the ever-changing landscape of customer expectations and market dynamics.

However, it is important to recognize that capacity planning is not a one-time endeavor; it is an ongoing journey that requires unwavering commitment, cross-functional collaboration, and continuous improvement .

As organizations embrace the principles and strategies outlined in this guide, they will be well-equipped to unlock new levels of efficiency, productivity, and competitive advantage, paving the way for sustained success in an increasingly complex and demanding business environment.

By fostering a culture of continuous learning and embracing the power of data-driven decision-making, organizations can achieve unparalleled levels of resource optimization, customer satisfaction, and long-term growth.

SixSigma.us offers both Live Virtual classes as well as Online Self-Paced training. Most option includes access to the same great Master Black Belt instructors that teach our World Class in-person sessions. Sign-up today!

Virtual Classroom Training Programs Self-Paced Online Training Programs

SixSigma.us Accreditation & Affiliations

Monthly Management Tips

• Be the first one to receive the latest updates and information from 6Sigma
• Get curated resources from industry-experts
• Gain an edge with complete guides and other exclusive materials
• Become a part of one of the largest Six Sigma community
• Unlock your path to become a Six Sigma professional

" * " indicates required fields

Case Study: Place Your Bets (Capacity Planning)

Case study: place your bets (capacity planning), the problem.

An electronics manufacturer service had invested significant resources into their relationship with a key customer, a professional-grade A/V equipment company, and was concerned whether their capacity planning was realistic. Meanwhile, the equipment company was pushing the manufacturer to expand capacity even further in anticipation of a spike in orders resulting from the release of a new product suite.  The manufacturing service’s capacity planning team wanted to find out if they should secure financing to build up capacity or if their customer’s projections were too ambitious.

Critical Issues

Channel Knowledge     End-User Perspectives     Competitive Assessment

The Solution

The capacity planning team conducted a Maven Electronic Survey of channel resellers, distributors, and large purchasers of the A/V company’s products regarding their perceptions of the company’s product pipeline and future prospects. The results confirmed that the company had a favorable market position, but raised clear concerns about their competitive threats and future prospects, leading them to delay further investment. When demand turned out to be weaker than their customer had forecast, the manufacturer avoided a very difficult situation.

“The customer wanted us to double down on our investment. Instead of rolling the dice we were able to make an informed decision.” – Chief Executive Officer

Want to learn more?

Share this story, choose your platform, related post.

Case Study: A New Dimension (3D Printing Consultant)

Case Study: Fresh Water Recovery

Case Study: Tiny Transporters

Case Study: A Penny Saved

Case Study: (Cold) Warm Calling

Case Study: Turning Up The Heat (Alternative Therapy Experts)

Training, support, and consulting.

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Administration

External network, collaboration, consultation tools, survey tools (internal only restrictions), community management, volume discount.

Capacity Planning Strategies: Types, Examples, Pros And Cons

In this article, you’ll learn about the three types of capacity planning strategies — lag, lead, and match. You’ll learn:

• What each strategy means
• Their advantages and disadvantages 
• And a practical example for each strategy

But first: 

Let’s quickly recap what capacity planning is.

Capacity planning is the process of balancing organizational capacity to meet customer demand. 

The capacity planning process is vital for all businesses but crucial for service agencies. Agencies provide services that require a high level of expertise and knowledge. This limitation means they need the correct number of qualified staff available to meet demand.

Capacity planning strategies provide a framework for balancing resource capacity.

Let’s look at each of these strategies in detail.

Lag Strategy

The lag strategy is the most conservative approach to capacity planning . 

It involves waiting until actual demand increases before adding capacity. This strategy can help minimize costs but lead to lost customers and revenue if demand rises quickly.

The lag strategy is a good option for organizations with a stable customer base and demand that will not fluctuate significantly. It is also a good option for organizations with a limited budget or time to add capacity.

Advantages of the Lag strategy

• Minimizes costs: The lag strategy is the most cost-effective approach to capacity planning. You save on resource costs because you only add capacity when needed. As a result, it helps avoid unnecessary expenses.
• Reduces risk: The lag strategy can reduce the risk of excess capacity. Overcapacity reduces because you only add capacity when confident that demand will increase.

Disadvantages of the Lag strategy

• Can lead to lost customers: If demand increases quickly, the lag strategy can lead to lost customers. This loss is because you may not be able to meet market demand, which can lead to customer dissatisfaction and churn.
• Can lead to revenue loss: The lag strategy can also lead to revenue loss. The revenue loss is because you cannot capture all the available demand, which can lead to lost revenue opportunities.

Example of the Lag strategy in action

A content marketing agency that provides content writing services might use the lag strategy. 

The demand for content writing services typically stays the same throughout the year. As a result, the agency could wait until actual demand increases before adding extra staff, which would help cut costs.

In conclusion, this strategy suits capacity management in a content marketing agency.

Lead strategy

The lead strategy is the opposite of the lag strategy. 

It involves adding resource capacity in anticipation of future demand. This strategy can help to ensure that you can meet customer demand, but it can also lead to excess capacity and wasted resources if demand does not increase as expected.

This strategy is a good option for organizations with a volatile customer base or expecting demand to increase. It is also a good option for organizations willing to take on some risk to ensure they can meet demand.

Advantages of the Lead Strategy

• Ensures meeting demand: The lead strategy can help you match the demand, even if it increases quickly. This advantage is because you have already added capacity in anticipation of the increase in demand.
• Reduces risk of lost customers: The lead strategy can help to reduce the risk of lost customers. You lose fewer customers because you are more likely to meet demand, which helps avoid customer dissatisfaction and churn.

Disadvantages of the Lead Strategy

• Can lead to overcapacity: The lead strategy can lead to excess capacity if demand does not increase as expected. This disadvantage can result in underutilized resources and increased costs.
• Can increase risk: The lead strategy can increase risk if demand does not increase as expected. Financial risks increase because you may have added capacity you do not need, which can lead to financial losses.

Example of the Lead Strategy in Action

Event management or tourism agencies might use the lead strategy. 

The demand for event and tourism-related services is typically seasonal. The agency could add additional staff before the season in anticipation of the increase in demand.

Hence this strategy is suitable for capacity management in event and tourism agencies.

Match strategy

The match strategy offers a middle ground between the lag and lead strategies. 

It involves adding capacity in direct proportion to demand. This strategy helps minimize costs while still ensuring that you can meet demand.

The match strategy is ideal for organizations with a moderately volatile customer base and demand. It is also a good option for organizations that want to avoid the risks of both the lag and lead strategies.

Advantages of the Match Strategy

• Minimizes costs and risks: The match strategy can reduce costs and risks. You can achieve this because you add only capacity when needed but also enough to meet demand.
• Increases flexibility: The match strategy can increase flexibility. This advantage is because you can adjust capacity as demand fluctuates, which can help you to avoid overcapacity or lost customers.

Disadvantages of the Match Strategy

• Can be difficult to implement: The Match strategy can be difficult to implement, especially if demand is highly volatile. You need experts to forecast market demand and add capacity accurately.
• Recruiting people on short notice can be difficult: While you can quickly fulfill industrial demand, hiring and onboarding people often takes much more time.
• Can be expensive: This is because you are adding capacity even when demand is not increasing. However, the match strategy can also help you to avoid the costs of lost customers and revenue.

Example of the Match Strategy in Action

An agency that provides consulting services might use the match strategy. 

The demand for consulting services fluctuates depending on the economic climate. In a strong economy, the demand may increase, while demand in a weak economy may decline.

As a result, a consultancy could use the match strategy to add capacity directly in proportion to demand.

Which capacity planning strategy is right for you?

Of the three types of capacity planning strategies — lag, lead, and match — the best strategy for your agency depends on the following: 

• Nature of your business
• Customer base
• Market demand
• Appetite for financial risks

The lag strategy may be a good option if you have a stable customer base and are confident that demand will not fluctuate significantly.

However, the lead or match strategy may be better if you have a slightly volatile customer base or expect demand to increase.

How to implement a capacity planning strategy?

There are four steps in the capacity planning process are as follows:

• Determine capacity. This exercise includes your team members, their skills, and availability. Plus, other resources, such as software licenses, hardware, and office space.
• Estimate demand. Estimating demand includes anticipating future workload. This process includes the number of projects, the amount of work involved, and the deadlines for each project.
• Match resources to demand. This activity involves ensuring you have enough available resources to meet your services’ demand.
• Monitor capacity and make adjustments. The step means regularly reviewing your capacity plan and making changes as your business grows or needs change.

Using capacity planning tools to implement a strategy

Resource management and capacity planning tools, like Toggl Plan, help you plan, track, and manage your team’s capacity. 

Toggl Plan’s Team timelines help you visualize your entire team’s workload in one place. Using Team timelines, you can:

• Organize your team members by skills. For example, a web design agency could create Team timelines for designers, writers, developers, etc.
• See who’s doing what and when. As a result, you can prioritize project tasks and rebalance workload as demand increases.
• Plan time off. Schedule your team’s public holidays and vacation days on the timeline to avoid scheduling conflicts.
• Monitor availability. Use the Availability Overview panel to see each team member’s availability during a specific period and match them to demand.
• Identify over and underutilized team members. This helps distribute customer demand when it suddenly increases.

Alternatively, you can use resource planning templates to plan your agency’s capacity. However, most teams rarely update spreadsheets in real time. As a result, your capacity planning process can become time-consuming and error-prone.

Best practices for implementing a capacity strategy

Effective capacity planning is about evaluating and managing your agency’s current capacity to meet market demand.

Following best practices can help:

• Track capacity utilization. Tracking capacity utilization helps you to identify areas where you may need to add or reduce current capacity. 
• Talk to your team. Understand your teams’ existing workload and time off plans. Communicate anticipated demand surges.
• Engage with your existing customers. This engagement helps anticipate demand in case customers have other projects to outsource.
• Work with other departments. For example, you could forecast new demand by talking to your sales team. Similarly, the accounting department could help you understand your financial risk capacity.
• Use capacity planning tools. Capacity planning tools help you calculate resource capacity accurately and balance workloads efficiently.

Effectively plan capacity for your business

Effective capacity planning is critical for all knowledge-based service agencies. 

If agencies don’t have enough staff to meet demand, they lose customers and revenue. On the other hand, margins will suffer if the market demand is not enough to engage the staff.

There are three types of capacity planning strategies — lag, lead, and match.

Using these strategies, you can develop an effective capacity plan, improve efficiency, and achieve business goals.

Jitesh is an SEO and content specialist. He manages content projects at Toggl and loves sharing actionable tips to deliver projects profitably.

Join 30,000+ subscribers getting the best tips on productivity, work management, hiring and more!

We promise we won't spam you and you can unsubscribe anytime.

You might also like...

Related to Toggl

Billable vs Non-Billable Hours: Difference, Strategies & More

Hundred5 is now Toggl Hire

NEW! Introducing Homeworks to Assessment Library

Take a peek at our most popular categories:

Transform teamwork with Confluence. See why Confluence is the content collaboration hub for all teams.  Get it free

• Project management
• Resource planning
• Capacity planning

All about capacity planning (and why it’s the reality check you need)

Plan effectively and avoid pushing your team to their limit

Browse topics

Every leader or project manager knows that understanding your team’s bandwidth can feel like a big guessing game.

Whenever a request comes in or you’re asked to lend a hand for a new cross-functional initiative, you’re faced with this question: Does your team realistically have the time to get this accomplished? Or, will saying “yes” spread everybody way too thin?

Whether you’re familiar with the formal term or not, that very exercise is capacity planning in action.

Ok, what is capacity planning?

Capacity planning is the process of identifying how many hours a project or task will require, determining whether or not your team has the available bandwidth to complete it, and then coordinating that work for maximum efficiency. 

As the name implies, the process can be split into two parts: capacity and planning . 

First, you’ll need to get a grasp on your team’s overall capacity, which is the maximum amount of work that you can pile on their plate before you’ve overextended them. Once you have that information in your back pocket, you move into the planning stage. That’s where you’ll prioritize tasks and schedule those hours so that work is completed by the intended deadline. 

For example, imagine that your team has been asked to pull data and compile a report to support the sales team – maybe they need a bunch of customer data from the past two years.

You’d review that project request, get a handle on the scope, and assign time estimates to get a basic understanding of how long that project will take to complete. From start to finish, you think it requires about eight hours of work. 

Next, you need to figure out if your team actually has eight hours to give. 

The easiest way to do this is to ask everyone on your team to write down all of the things they do in a typical week, along with estimates of how long they spend on each activity expressed as hours per week. They should refer to their calendars, email inboxes, Jira tickets , and more to make sure they’re being as realistic as possible. That will give you the total hours they’re currently working in a week.

From there, you can see where there is wiggle room to slot new projects in. You’ll also identify the best people to assign it to (based on who has the most flexibility with their workload) and set a more realistic deadline for getting that project turned around. 

Maybe Dennis’ current obligations are only adding up to about 30 hours per week and he has the availability and expertise to take this request on, but he says he’ll need until Monday to finish the report.  

Capacity planning means you’ll root the project plan and expectations in reality, rather than your optimistic guesses about what your team can churn out.

Capacity planning in action

For step-by-step instructions on how to run a capacity planning session, check out our capacity planning play . Then, document the results of your session in this capacity planning template available for use in Confluence. Here’s what your capacity planning document will look like:

What about the other types of planning I hear about?

Difference between capacity planning and capacity management.

As you start to sink your teeth into capacity planning, you might also hear the term capacity management . It’s most frequently used in regards to IT teams and projects, but does crop up in other industries as well. 

Capacity management is a broader concept that describes a business’ overall ability to oversee and coordinate all of the resources they have available to meet project requirements. 

Think of capacity management as the umbrella term, and capacity planning is a single piece of the overall capacity management process – sort of like how interviews are a piece of your overall hiring process.

Difference between capacity planning and resource planning

You might also hear mention of resource planning. It’s a term that’s often used interchangeably with capacity planning, but there’s actually a difference.

Capacity planning looks specifically at your people resources to determine if you have the skills and available hours to meet a project’s requirements. For example, can your team reasonably fulfill that data request by Friday? 

Resource planning, on the other hand, is about the allocation of specific resources, whether it’s people, budget, software, equipment, materials, and more. 

The goal is to make sure that you’re appropriately utilizing each particular resource to make the most of it. For example, could you make some changes to your data dashboard to help it pull those numbers more efficiently? Are there other reports that you should delay running to make space for this one? How could you maximize the impact of that particular tool? 

The advantages of capacity planning

Capacity planning can take some practice, especially if you’re accustomed to enthusiastically nodding “yes” to every request that lands on your plate. But, getting into this habit offers numerous benefits.

1. Avoid team burnout

Here’s a frightening statistic: 48% of workers say they have too many unreasonable deadlines and too much work to do. It makes sense – if there’s no visibility into how much a team can accomplish, they’re bound to end up overextended. After all, there’s always more work to be done. 

Taking steps to get a thorough understanding of your team’s actual capacity means you won’t overwhelm them with too many tasks and responsibilities, and can also support them in managing their time by prioritizing their most impactful work. 

2. Set more realistic deadlines

You’re already familiar with the fact that projects tend to run way over schedule. Blame the planning fallacy , which states that we’re all eternal optimists who grossly underestimate how long projects will really take. 

That bias is tough to combat, but capacity planning can help. Especially if you get details about availability straight from your team, you’ll get a much-needed reality check so that you can manage deadline expectations according to what your team can actually produce.

3. Identify skills shortages

Capacity planning is about understanding what work your team can accomplish. That doesn’t just relate to time – it relates to skills too. Unfortunately, 54% of employees report that they don’t already know everything they need to know in order to do their current jobs. 

By evaluating your team’s capacity and planning work in advance, it’s easier to spot if projects require skills that your team doesn’t have. Maybe that request from the sales team needs some big data chops you don’t possess in-house.

Accounting for that early allows you to take proactive action, such as training someone on your team, outsourcing a task, or changing the scope of the project.

The challenges of capacity planning

Capacity planning offers numerous advantages, but it also requires some elbow grease. Let’s cover a few of the common hurdles you’ll need to jump over.

1. It’s tough to understand bandwidth

Think capacity planning is a one-time activity? Think again. Your team’s bandwidth is always evolving as projects change and team members leave or join the ranks. Plus, you need to rely on people’s honesty about their current workloads and limitations.

All of that makes it challenging to get a firm grasp on just how much capacity your team has available to tackle new work and requests, particularly if you have a team full of high-achievers who always believe they can take on more. The more often you talk with your team about capacity planning (most teams do it weekly), the easier it’ll get for all of you to be realistic. 

During these sync calls, Jira's Plans  can help visualize and understand team members' workload and capacity.

2. Changes will throw you off track

You don’t have a crystal ball handy, and even the most experienced and well-intentioned project managers will hit some snags. There are risks associated with every project, and unforeseen circumstances – from seasonality to industry changes – will throw wrenches into your plans.

When you need to try to account for all of those potential setbacks, capacity planning isn’t always so straightforward. Planning in a cushion (even if it’s just an extra day or two) will help you roll with the punches, without things running off the rails.

3. You’ll have to engage in some hard conversations

If your team has previously been the “yes” team within your company, committing to capacity planning is going to mean saying “no,” too.  

Remember, capacity planning is only useful if you do something with the information you identify. That can involve turning down projects due to lack of bandwidth, adjusting or reducing expectations, and pushing out deadlines. It’s always better to say no than to say yes and not deliver. 

Capacity planning best practices

Capacity planning will take some practice (and some trial and error), but here are a few tips to get you started on the right track.

1. Learn from past projects

Experience is a great teacher, provided you’re willing to look back and learn from those lessons. When your team completes a project, don’t just wash your hands of it and move on. Host a postmortem to discuss how things went, paying close attention to any spots where capacity was stretched.

What led to that issue? Did the project scope expand? Did team members overestimate their availability? Pinpoint the root cause, and identify ways that you can avoid the same fate moving forward.

2. Have honest conversations with your team

Nobody has a better grasp on how much bandwidth your team has available than your team members themselves. They’re the ones with boots on the ground, so you should be engaging in candid conversations about their workloads and what additional projects they think they could take on.

Remember that capacity is constantly evolving, so this needs to be a recurring conversation. Dedicate a few minutes of your regular team meeting to discussing what’s currently on everybody’s plate so that you’re armed with updated information about their existing workloads and obligations. Documenting these conversations on the Roles and responsibilities template is helpful to reference back on at the beginning of new quarters, projects, or future capacity check-ins.

3. Get the necessary details upfront

When there’s a new project on the table, it’s easy to fall into this trap: You agree to the requirements and the request, and then you figure out how your team is going to make it happen.

To work smarter, not harder, use capacity planning to work backwards. Start by getting a realistic grasp on how much your team can accomplish, and then plan all of your work from there. 

Avoiding the dreaded guessing game about your team’s bandwidth means you’ll be able to effectively prioritize projects, set more realistic expectations and deadlines, and preserve your team’s morale – all while saving everybody a ton of stress and frustration. 

Make this process even smoother by using Jira templates  and the capacity planning template in Confluence to create and organize the work across all teams. Happy planning! 

Stop guessing and start planning

You may also like, roles and responsibilities template.

Define responsibilities for team members and identify opportunities for team growth

Capacity planning template

Take the guess work out of your estimation and prioritization

Enable faster content collaboration for every team with Confluence

Copyright © 2024 Atlassian

• Harvard Business School →
• Faculty & Research →
• November 2005 (Revised March 2006)
• HBS Case Collection

Genentech - Capacity Planning

• Format: Print
• | Pages: 27

About The Author

Steven C. Wheelwright

More from the authors.

• November 2015
• Harvard Business Review

The Prius Approach: How Hybrid Technologies Help Companies Survive Disruption and Shape the Future

• Faculty Research

Cleaning House: The Impact of Information Technology on Employee Corruption and Performance

Operations management reading: forecasting.

• The Prius Approach: How Hybrid Technologies Help Companies Survive Disruption and Shape the Future  By: Nathan Furr and Daniel Snow
• Cleaning House: The Impact of Information Technology on Employee Corruption and Performance  By: Lamar Pierce, Daniel Snow and Andrew McAfee
• Operations Management Reading: Forecasting  By: Steven C. Wheelwright and Ann B. Winslow

Resource management

What is capacity planning? Types, strategies, use cases

As a business owner, you understand the value of project management . You need to be able to organize your team, assign tasks to people with the right skill sets, and prioritize your projects and clients. However, knowing how to meet demand and increase the profitability of your business can seem overwhelming. In order to maximize the available capacity of your organization, you need capacity planning.

Effective capacity planning will help you eliminate bottlenecks and take advantage of all available resources in your company, which can help your business remain agile and increase customer satisfaction. This article will help you understand what capacity planning is and why this initiative is important for improving your bottom line and effectively managing your business.

• What is capacity planning?

Capacity planning is a project management process that helps you understand your workforce, tool, and production capacity to meet client demands for projects. It helps you make sure you know exactly what resources need to be available to meet demand effectively. 

Capacity planning is important in ensuring your business is running smoothly. Without proper capacity planning, you could be dealing with major inefficiencies that slow down your growth and upset your clients.

For example, consider a scenario where a new client is looking to work with you, and you accept before doing any capacity planning. Suddenly you learn that you don’t have enough team members to work with the new client, your tools can’t take on new projects, and you don’t have enough product to fill orders. Your new client, who was excited about working with you, will now have to deal with delays and hold-ups that can make them unhappy. If you had used capacity planning, you would have been able to give accurate timelines and improve your project planning.

• Why is capacity planning so crucial for businesses?

Capacity planning isn’t just an option for businesses. If you want to be successful and make the most of your current capacity, you need to understand the value of capacity planning and resource utilization . There are many benefits of capacity planning that will help you improve your business and be a better manager for your team.

Answers important questions

Capacity planning helps you answer key questions that help you with project management deliverables and processes . It addresses questions like:

Do we have the bandwidth for new projects or clients?

What skill sets are most valuable to us?

How long will it take to meet customer demand?

What processes will help us improve efficiency?

Where are we experiencing slowdowns in our process?

Reduces costs

When projects go over budget or creep beyond the initial scope, it can add to your overhead costs. The same can happen when you need to buy more seats for your digital tools, have team members work overtime, and waste products through inefficient processes. When you have proper capacity planning strategies in place, you can reduce your costs and start improving your profitability.

Manual work getting you down?

We've got a shedload of free templates that will do the heavy lifting for you

Browse templates library

Improves supply chain management

In addition to being a part of project management, capacity planning is also part of your supply chain management . When you have a plan for capacity management, you can also get a better idea of how your resources are being used and when you need to reorder materials or products. This helps you avoid stock-outs and makes your customers happy when you can offer accurate deadlines and deliveries.

Identifies inefficiencies

Capacity planning gives you an overview of your business processes and a clear picture of where there might be inefficiencies in your existing processes. When you evaluate your capacity resources, you can see if there are any areas where resources aren’t being utilized correctly and where you can improve. These insights can drive real-time decision-making and improve your business management skills.

Leads to happier teams

No one likes to be overworked or stressed out on the job. When you have poor planning in your workplace, it leads to unhappy employees and higher turnover rates. With capacity planning, however, you can accurately track your team members’ time and availability. That helps you stop overloading your team members and can ensure that people with the right skill sets are being assigned to the right tasks and projects.

• Breaking down the different types of capacity planning

You need to be aware of a few different types of capacity planning as you start to consider a strategy for your business. Depending on what type of business you are, like manufacturing or SaaS, your business might have different needs for different areas of capacity planning.

1) Workforce capacity planning

The first type of capacity planning is workforce capacity planning. This type of planning involves your team members and their skills, roles, and availability. To reduce workplace burnout , you want to make sure that your teams have balanced work schedules and that you are operating efficiently.

During the course of workforce capacity planning, you will discover whether you need more staff, if people are in the right roles, and if there might be a need to rearrange teams or titles to ensure that you're using your workforce in the best way. When you successfully accomplish this type of planning, you get happier teams and have staff members in the right place to do their jobs to the best of their abilities.

2) Tool capacity planning

Not every project requires the same types of tools. Tool capacity planning helps you allocate the tools you currently have available and understand what new tools you might need in order to fulfill customer demand when you have a new project or a client coming in the door.

Tools might refer to things like specialty machinery, vehicles and transportation equipment, materials, or digital platforms and online tools. No matter what kind of tools your business uses to complete work, you will need tool capacity planning to ensure that they are being used correctly and are worth the investment it took to secure them.

3) Product capacity planning

Product capacity planning is used in businesses that deal in products. If your business is in the service industry, then this type of capacity planning might not be relevant to your needs. Product capacity planning involves the management of raw materials and components needed to make products.

When you work in industries like retail, e-commerce, or manufacturing, knowing what materials and products you have available is essential to making sure that you can fulfill orders and deliver finished products to customers on time. Without planning, you could end up with endless delays and unhappy customers.

• Capacity planning strategies

Capacity planning isn’t a one-shoe-fits-all solution. There are different approaches and tactics you can implement in order to get results and improve your processes. Here are the main capacity planning strategies and what industries and businesses they work best for:

Lag strategy

Lag strategy is a strategy that focuses on actual demand and current orders. Rather than trying to forecast and make deliverables ahead of time, this approach only allocates resources when the need arises. This works best if you have a small business that is just getting started or if you know you only need to have a few resources set aside for new projects.

Lead strategy

Lead strategy is the opposite of the lag strategy. Rather than waiting for a project to come in, lead strategy uses demand forecasting to predict what resources you'll need in the future and creates excess capacity in order to fulfill those resource requirements when needed. This works best for businesses that operate seasonally, like holiday-oriented businesses or ones that increase their sales during specific times of the year.

Match strategy

Match strategy is the best of both worlds between lag strategy and lead strategy. It focuses on strategic planning and carefully considers each project that comes up. You need to monitor your current demand, look at your upcoming projections, and constantly develop your strategy to shift when needed. It’s a flexible approach that works best for most businesses.

• Capacity planning vs. resource planning: Main differences

Capacity planning and resource planning are two terms that are often used interchangeably. However, there are clear differences between the two that you should note as you work on planning for your business.

Capacity planning is a strategic approach that looks at the big picture. It focuses on your organization's overall processes and availability and how you can improve them. It’s a high-level strategy that is useful for planning on a large scale.

Resource planning, on the other hand, is much more tactical and specific. It looks at individual resources within your organization and applies them to each particular project or client that you have. This allows you to get granular with your planning and create a plan for each individual task and step in your process.

• Capacity planning use case: Make to Stock (MTS)

Let’s take a look at a specific use case of capacity planning to help you picture it in action. Say, for example, that you run a specialty swimwear business. You know that it takes a certain number of team members and manufacturing equipment to create a single piece of swimwear, and you know how much time it takes to make one item.

In order to create a capacity planning strategy that works for your business, you implement a make-to-stock (MTS) model. This is a lead capacity planning approach where you plan out your production schedule based on your forecasted demand. Because you know that summer will lead to an uptick in your sales, you can plan ahead of time to start stocking up on products to meet the upcoming demand.

With this capacity planning model in place, you won’t be surprised by the rush of orders coming in during the early summer months. Then, you can prepare ahead of time to meet demand and ensure you have enough workers, products, and equipment to meet your capacity planning goals.

• Master your capacity planning with Teamwork.com

Mastering capacity planning ensures that your team makes the best use of all available resources. It reduces waste, increases efficiency, and helps your team members avoid burnout and overwork. When you can control your resource management and capacity planning process, you can gain a full view of your availability to streamline your business. With capacity planning, you can give better timelines for deliverables and ensure customer satisfaction.

At Teamwork.com, we understand how important capacity planning is to you and your clients. That’s why we offer advanced capacity planning software and automation tools to help you with resource allocation, strategic planning, and forecasting for new projects.

See more of what Teamwork.com can do for your business now - get started now for free, view our comprehensive pricing plans , or book a demo today.

The only all-in-one platform for client work

Trusted by 20,000 businesses and 6,000 agencies, Teamwork.com lets you easily track, manage, and customize multiple complex projects. Get started with a free 30-day trial.

Try Teamwork.com for free

TABLE OF CONTENTS

Teamwork.com: The all-in-one platform for client work

Learn how Teamwork.com lets you drive business efficiency, grow profits, and scale confidently.

Síle is a Senior Content Marketing Manager at Teamwork.com. She has been working in the project management software space for over 7 years, exclusively serving the agency sector. She loves providing agencies with actionable insights and captivating content to help navigate the ever-evolving landscape of project management.

Top 6 valuable certifications for aspiring product managers

KPI reports: Exploring the building blocks and advantages in professional services

Business performance: A helpful guide for agencies

Top 9 employee time-tracking software options to help prevent micromanaging

Agency Time Management Report: Make every billable minute count with these 4 key learnings

Effective change management: A step-by-step guide

Mastering the challenge of capacity management

Significant demand variability is common in many service environments—most notably in call centers, hospitals, field delivery, and retail operations. Each of these environments faces a daily, weekly, or seasonal struggle to meet customer service expectations at peak times without leaving expensive staff idle during lulls. Managing variable demand can be a source of tension between functions too. For example, account management teams want to ensure their service level agreements are met and will strongly resist attempts by operations managers to reduce staffing levels if they believe them to be threatened. Even the occasional inability to meet service level targets during peak times is stressful for service teams, often leaving them with the false impression that facilities are always understaffed.

While many successful companies take steps to increase frontline efficiency with lean management techniques, a similar opportunity often resides in understanding incoming work and optimizing labor accordingly. This practice is known as workforce management (WFM) and encompasses a range of strategies used to shape the available labor supply, and sometimes the incoming demand, to improve service and minimize idle time. One of the core levers of effective workforce management systems is the use of a broader shift mix to ensure there are enough of the right people in place at the right time at the most efficient cost. New shift structures can take a number of forms, including weekly or seasonal part time work, alternate shift patterns—like fewer, longer days—and staggered shift start times.

New systems can even readjust these shifts and allocate tasks dynamically to get an even better match between supply and demand. Some large retailers, for example, are making use of thermal imaging cameras to monitor the movement of customers in their stores. This technology then alerts managers if customer numbers are significantly higher than forecast, allowing them to pull staff from the shop floor to checkouts before queues begin to emerge.

Overcoming the barriers

There are a number of barriers that stand in the way of the wider adoption of advanced workforce management approaches. Some of these are technical: companies may lack the skills or infrastructure to forecast incoming demand to a level of accuracy suitable for improved shift planning. Others are organizational, as companies may not have the WFM support resources they need to create and manage complex shift patterns, or they may have labor agreements in place that preclude their use.

In our experience, however, the underlying root cause of much reluctance is one of mind-sets and a misunderstanding of the real power of workforce management. Operations managers may see central scheduling support as taking independence away from the field. Companies frequently assume that the cost of implementing the necessary forecasting and scheduling infrastructure for an effective WFM system will outweigh the benefits they gain from its use. Or they fear that implementation will take too long to give them the short-term impact they require. Moreover, they may worry that new shift practices will be unpopular and disruptive for a large part of their workforce, creating issues with morale or attrition.

Getting more for less

In practice, many of the common barriers to WFM adoption prove to have little basis in fact. Recent advances in data analytics and enterprise IT mean improved demand forecasting systems can be developed and implemented much faster and more cheaply than in the past. One European bank, for example, built a new forecasting system for its customer call centers using a combination of its spreadsheet tools and data drawn from its existing enterprise resource planning system. In less than a month the bank was able to reduce weekly demand forecast error by 40 percent and intra-day error by more than 20 percent. On the basis of this improved forecasting capability, it was able to roll out new shift systems with the potential to improve productivity in its call centres by 30 to 50 percent. Data-driven forecasting systems like this also help companies avoid understandable, but expensive, bias in their workforce planning. Sales teams may have a natural tendency to be over-optimistic in their demand forecasts, for example, leading to overstaffing.

Concerns about human disruption are valid, but can be overcome. Most companies that adopt flexible shift systems find that a significant number of their employees actually prefer the extra flexibility offered by the new approach. Flexible shifts can also become part of an organization’s overall performance management system, as senior or better-performing employees can be rewarded with better access to the shifts they want. And over time, flexible working can become part of an organization’s offering to new staff, helping to attract those for whom flexibility is a bonus, not a burden. Ultimately, good workforce management means better day-to-day working conditions for all staff, since they will have to deal with fewer impatient, frustrated customers.

Perhaps most significantly, as the Chip Game (see sidebar) vividly demonstrates, even moving a relatively small fraction of the overall workforce to new flexible shifts can have a dramatic effect on overall utilization. Take the case of a large bank. Its call center was consistently struggling to meet demand at its mid-day peak, while its existing shift system left many agents idle during the quieter morning and late afternoon periods. The bank responded with some targeted measures.

The Chip Game

One simple but effective way of demonstrating the true power of workforce management is the Chip Game. Developed by McKinsey, the Chip Game is a physical board game or iPad application that requires players to attempt to match available staffing hours to variable demand at the lowest overall cost. The Chip Game serves as a way to introduce managers to the principles and benefits of workforce management (WFM), and as a tool to help them visualize what a flexible staffing implementation might look like. In the iPad version, the game can be adapted to mirror companies’ real demand patterns, in order to accurately estimate the impact of new shift structures in a wide variety of environments from banks to hospitals, retail stores, and more. For more information, contact the authors.

It introduced shift start times staggered over a two-hour window for a third of the workforce. It offered shorter six-hour peak-time shifts to another fifth. And it introduced measures to put back-office staff on front-line phone duty during the highest peaks in demand. The result of these changes was dramatic. The call center’s ability to meet its service level targets rose to 90 percent of the time, up from 80 percent, while the overall occupancy level of its agents rose from 60 percent to 80 percent, allowing it to transfer 10 percent of the center’s frontline staff to duties elsewhere.

Cost effectively maintaining service levels in environments with highly variable demand will be an on-going challenge for companies in many sectors in the coming years. While outsourcing and lean management can improve the efficiency of the existing workforce, managers need additional tools to meet this challenge. Using workforce management techniques to increase flexibility is a quick, effective lever that they should be more willing to embrace. Even a relatively small amount of increased flexibility, if supported by the right infrastructure and tools, can be an effective way to deliver significant savings without sacrificing service levels or customer satisfaction.

About the authors: Jeff Berg is a principal in McKinsey’s Southern California office and Arnaud Valeille is a consultant in the New Jersey Office.

The authors would like to thank Erez Eizenman and Praveen Adhi for their contributions to this article.

.css-s5s6ko{margin-right:42px;color:#F5F4F3;}@media (max-width: 1120px){.css-s5s6ko{margin-right:12px;}} AI that works. Coming June 5, Asana redefines work management—again. .css-1ixh9fn{display:inline-block;}@media (max-width: 480px){.css-1ixh9fn{display:block;margin-top:12px;}} .css-1uaoevr-heading-6{font-size:14px;line-height:24px;font-weight:500;-webkit-text-decoration:underline;text-decoration:underline;color:#F5F4F3;}.css-1uaoevr-heading-6:hover{color:#F5F4F3;} .css-ora5nu-heading-6{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;-webkit-box-pack:start;-ms-flex-pack:start;-webkit-justify-content:flex-start;justify-content:flex-start;color:#0D0E10;-webkit-transition:all 0.3s;transition:all 0.3s;position:relative;font-size:16px;line-height:28px;padding:0;font-size:14px;line-height:24px;font-weight:500;-webkit-text-decoration:underline;text-decoration:underline;color:#F5F4F3;}.css-ora5nu-heading-6:hover{border-bottom:0;color:#CD4848;}.css-ora5nu-heading-6:hover path{fill:#CD4848;}.css-ora5nu-heading-6:hover div{border-color:#CD4848;}.css-ora5nu-heading-6:hover div:before{border-left-color:#CD4848;}.css-ora5nu-heading-6:active{border-bottom:0;background-color:#EBE8E8;color:#0D0E10;}.css-ora5nu-heading-6:active path{fill:#0D0E10;}.css-ora5nu-heading-6:active div{border-color:#0D0E10;}.css-ora5nu-heading-6:active div:before{border-left-color:#0D0E10;}.css-ora5nu-heading-6:hover{color:#F5F4F3;} Get early access .css-1k6cidy{width:11px;height:11px;margin-left:8px;}.css-1k6cidy path{fill:currentColor;}

• Product overview
• All features
• App integrations

CAPABILITIES

• project icon Project management
• Project views
• Custom fields
• Status updates
• goal icon Goals and reporting
• Reporting dashboards
• workflow icon Workflows and automation
• portfolio icon Resource management
• Time tracking
• my-task icon Admin and security
• Admin console
• asana-intelligence icon Asana Intelligence
• list icon Personal
• premium icon Starter
• briefcase icon Advanced
• Goal management
• Organizational planning
• Campaign management
• Creative production
• Marketing strategic planning
• Request tracking
• Resource planning
• Project intake
• View all uses arrow-right icon
• Project plans
• Team goals & objectives
• Team continuity
• Meeting agenda
• View all templates arrow-right icon
• Work management resources Discover best practices, watch webinars, get insights
• What's new Learn about the latest and greatest from Asana
• Customer stories See how the world's best organizations drive work innovation with Asana
• Help Center Get lots of tips, tricks, and advice to get the most from Asana
• Asana Academy Sign up for interactive courses and webinars to learn Asana
• Developers Learn more about building apps on the Asana platform
• Community programs Connect with and learn from Asana customers around the world
• Events Find out about upcoming events near you
• Partners Learn more about our partner programs
• Support Need help? Contact the Asana support team
• Asana for nonprofits Get more information on our nonprofit discount program, and apply.

Featured Reads

• Project planning |
• What is capacity planning? Tips to appl ...

What is capacity planning? Tips to apply the right strategy

Capacity planning is the process of determining the potential needs of your project. There are three types of capacity planning: lead capacity planning, lag strategy planning, and match strategy planning. Applying the right strategy will help your team feel prepared for changes in needed and available capacity.

Before you start baking a cake, the first step is to make sure you have the right amount of ingredients. If you're short an egg or down a little bit of sugar, your cake is sure to come out tasting a little bit odd. 

The same is true for a big project: If you don't have enough resources to complete the project, it will not turn out as expected. To make sure you have all of the right ingredients when you need it—in this case, team members, skills, and tools—use the capacity planning process.

What is capacity planning?

Capacity planning is the process of determining the potential needs of your project. The goal of capacity planning is to have the right resources available when you’ll need them. Resources could mean individuals with the right skills, time available to add another project, or the necessary budget.

Capacity planning strategies

There are three types of capacity planning that you can use in different scenarios to optimize production capacity.

Lead capacity planning

Lead capacity strategy, or lead strategy, is the process of increasing production capacity when you're in anticipation of a high demand. 

Example: If you’re a retailer, you may need to hire an influx of seasonal workers during the holidays, whether that’s for a whole season or just for a seasonal sale. By anticipating higher customer traffic, you can better staff your team and add additional headcount over a short period of time. 

Lag strategy planning

Lag strategy planning is the process of increasing production capacity when you’re experiencing  a real-time demand.

Example: Lag strategy planning is often used in medical care, social work, or the restaurant industry when someone is "on call." Depending on how busy your team is, you may call additional team members in to make sure there are enough resources (in other words, team members) to cover all the customers’ or clients’ needs. 

Match strategy planning

Match strategy planning is a combination of lead capacity planning and lag strategy planning. The process of match strategy planning requires slowly increasing capacity in small increments until you reach the desired resource utilization.

Example: Let’s take the previous example of the restaurant industry—as a floor manager, you may have several different employees on call for the night. If you get an unexpected large party in, you may decide to call in more than one server to cover until crowds die down.

The capacity planning process in five steps

The capacity planning process can vary from company to company, but there are a few core steps that happen in every process: 

1. Forecast your anticipated demand

If you know you have a new project coming up, make an educated estimate on what work needs to be done for these projects. This will give you an idea of the capacity that you’ll need to complete the project and you can compare that to the current capacity you have on hand.

2. Determine required capacity

For example, engineering managers estimate capacity planning according to the number of hours needed to complete a project.

3. Calculate the resource capacity of your current team

If you’re adding another project to your team’s plate, you want to make sure they have the capacity to handle it so they don’t burn out.

If the average person can do approximately 30 hours a week and they currently have projects they are working on, see how much capacity they have in a week by subtracting their current workload in hours from the average 30.

4. Measure the capacity gap

Based on the capacity needed for a project, measure how your current resources compare to the anticipated demand.

5. Align capacity with demand

Look at the previous gap in capacity and optimize current and available capacity so they are balanced. If your team is currently at capacity and can’t take on additional work to complete the project, add more team members in the short term to get the project done. If you have excess capacity, consider adding another project to effectively optimize your available resources.

Benefits of capacity planning

As a project manager , one of the best things you can do to support your team is to create a capacity plan . Knowing the capacity requirements for different projects can help prevent bottlenecks and keep a supply chain flowing. Here are the most important benefits of capacity planning:

It prepares you for different scenarios

A well-strategized capacity plan can help prevent scope creep and take pressure off of your team. If you know the steps you have to take for each type of capacity—whether that’s excess capacity or a lack of resources—you’ll be able to meet demand during any given period.

It optimizes team bandwidth

Effective capacity planning aligns your current team’s skill sets with their availability for new projects. If there are not enough available resources for a project, you’ll know that you need to add more resources to your team. 

Understanding your team's skill sets and knowing their capacity for additional work is crucial. It can speed up the decision-making process when it comes to staffing and prevent burnout—which 71% of workers experienced at least once in 2020 .

It minimizes production costs

When you manage your team's capacity, you're optimizing your resources for the scope of work that you need to complete. This means that you're not paying for more resources than you need, ultimately minimizing production costs.

For example, if you have 12 members on a team working on Project A that only needs nine members, you can allocate three of those team members over to Project B, minimizing the spend on Project A.

It makes planning for the future easier and more accurate

Capacity planning isn’t just helpful for your current projects, it can also help you scope out capacity needs for the future. When you create a capacity plan for one project, you can use that as a template for a similar project in the future.

That template will be a useful starting point and you don't need to forecast capacity requirements from scratch. This can save your team time and expedite the capacity planning process.

It creates transparency

Your capacity plan will highlight any inefficiencies that you can optimize. This kind of data is highly valued by stakeholders who like to be in the know when it comes to how they invest their resources and money.

What's the difference between capacity planning and resource planning?

While they are sometimes used interchangeably, capacity planning and resource planning are similar but slightly different project planning strategies. 

Capacity planning focuses on the supply and demand of your resources. The idea is that a strong capacity plan can forecast when you’ll have an increase in demand for more resources so you can anticipate that gap. 

Resource planning focuses on the resources that you already have and where you can allocate those resources . Resource capacity planning is a combination of the two: anticipating the need for more resources in the future.

Capacity planning tools

There are many different capacity planning software and tools on the market, and finding the right one depends on what you want to prioritize for your team. Some resource management tools are highly specific and focus only on capacity planning or resource management.

Using a work management tool like Asana can help you manage resources, monitor your team's workload, and streamline communication—all in one platform. Take the team at Hudl for example. They regularly monitor workload in Asana so they can easily reassess their team’s capacity and reassign work before anyone burns out. 

Because they can view their work in one shared space, no one is overbooked.

Related resources

How to use a feasibility study in project management

How to track utilization rate and drive team profitability

How to accomplish big things with long-term goals

Smooth product launches are simpler than you think

We use cookies to enhance your browsing experience and analyze our traffic. By using our site, you consent to cookies. Privacy policy

Just in: Employee Retention Index Q1 Results

Case Study: Federal government

Enabling future decision-making through capacity planning and workload analytics, unconventional consulting—and breakthrough results.

Increase in real-time data availability

Accuracy forecasting 5-year workloads demands

Staff who now benefit through better alignment and optimization

A large U.S. federal health agency decided it needed a more transparent resource capacity planning function to help carry out its mission and respond to rapid changes in workload demands. They also saw how developing a systematic analytical function for accurately forecasting workload could better inform and justify resource requests to Congress and industry.

Eagle Hill was asked to guide the development of responsive, data-driven user tools that would expand transparency into resource needs and revolutionize the organization’s decision-making.

Create incisive, data-driven workload management tools to optimize future decision-making and resource alignment.

Our starting point

The complex subject matter and requirements of a large and diverse group of stakeholders required Eagle Hill to adhere to rigorous program management practices, while remaining flexible and responsive. We had to:

Collect and analyze data across multiple sources to understand workload, staff roles, and responsibilities as the basis of forecasting models.

Leverage predictive statistical modeling to develop robust forecasting algorithms, providing meaningful insights into workload management. We developed decisioning logic to identify where to assign new employees based on resource capacity constraints.

Create a Tableau-based resource capacity planning model to forecast workload and associated skillsets needed to complete future work.

The roadmap to success

We conducted visioning sessions to align project stakeholders on desired goals and created a steering committee to validate decisions throughout the project. 

As we collected information, we also conducted interviews with SMEs to understand the nuances of the data and sources. During this process, we identified numerous data quality issues and gaps, and developed an approach to improve availability and quality of data.  

We leveraged regulatory and time-reporting data to provide dynamic data visualization dashboards and help leadership understand workload management across offices, divisions, and branches.

We expanded information transparency across the organization by improving the access to and quality of performance and time reporting data. Previously, fewer than 20 full-time employees received limited performance and time reporting data. Now, more than 125 directors, managers, and team leads can access real-time performance and capacity planning data.

We conducted weekly meetings to discuss significant milestones and risks. By providing expert guidance throughout the program, we helped the client get the most out of the new tools and see the value of long-term investment in resource capacity planning.

We managed the complexity of bringing together 30+ datasets from across 20 divisions on schedule and on budget, with no revisions required.

To ensure the client’s ongoing success, we created model maintenance procedures, user guides, and training that helped the client build its internal capacity for ongoing operations of the resource capacity planning model and workload management dashboards we developed.

Related Services

Related Industries

Revolutionize your decision-making and workload management

Eagle Hill helps organizations of all sizes, in all industries bring business goals to life.

Related content

Creating a future of work strategy to support hybrid work for a public health plan

Optimizing inspection process unlocks 30% capacity gains for public health client

Federal workforce planning

• Performance
• Case studies
• Federal government
• Financial services
• Healthcare and life sciences
• State and local government
• Technology, media and entertainment
• Living Labs
• Our community
• Video library

Case Studies

Capacity Planning 101: Strategies, Benefits, and Challenges

Marcel Petitpas

Apply for a Call w/ Parakeeto

Last updated Sep 18, 2023 | 0 comments

Introduction

One of the questions we spend a lot of time worrying about as agency owners and executives thinking about is balancing our capacity against the work we need to do for clients. Are we understaffed or overstaffed? How will that change in the future? What happens if we do or don’t sign the deals in the pipeline? What if we do or don’t decide to hire that next key employee?

The larger your agency grows, the more of your time will be spent on these questions, and the further into the future your team will need to be able to look. Failing to do so could mean catastrophic impacts on your team, your growth and your margins. Unfortunately, while capacity planning is a simple concept, it’s much more difficult to execute in practice. In this post, we’ll demystify the most common points of confusion we see our clients face, and lay out some of the core concepts you need to understand in order to effectively plan your capacity needs into the future.

What Is Capacity Planning?

Firstly, let’s lay some groundwork on capacity planning as a whole. 

In short, capacity planning is a technique used to look into the future to anticipate your team’s capacity needs. In other words, it’s laying out and analyzing how much work they can handle. An effective capacity plan allows you to make decisions in two main areas of your business: staffing and timelines.

For staffing, you’ll need to know which people, teams or departments need help, and which ones need more projects to work on. It will allow you to understand where you’ll need to add more manpower, or enlist help from outsourced teams. 

For timelines, you’ll need to know when to start each project, where each project should end, how many projects to sell, and implications if scope on your projects get out of hand.

A great capacity plan enables your project and operations team to thrive. There are a few ways you can get there, starting with the types of capacity planning that you can do.

Types of Capacity Planning

There are a few ways to go about planning your capacity:

Capacity Planning Strategies

• This strategy has your team run various scenarios to preemptively identify potential bottlenecks and other issues with the system, to ensure you’re covered, or enable you to prepare appropriately.
• Agile strategy focuses more on being informed by what has happened in the past, then leaving plenty of room for ongoing, consistent tweaks to the plan as your projects progress. It’s much more flexible than other approaches.
• This is an aggressive strategy for high-growth companies with strong cash-flow. It involves hiring out ahead of capacity needs to maintain the highest speed of growth. 
• This is the opposite, a more conservative approach, that involves basically not hiring until the last minute or when the demand is already confirmed and required.
• This is best for companies with tighter cash-flow or a fast ramp-up period for their talent
• This is the goldilocks strategy, basically trying to time your hiring to match demand as closely as possible. Naturally, it’s the most challenging to do and requires a good mastery of both top-down and bottom up resource planning. 

But aside from these, you’ll also want to consider which approach you’re looking to take. A top down or bottom up approach:

Top-Down and Bottom-Up Forecasting

While the above strategies can be applied to a certain extent to your forecasting process, you’ll also want to figure out which approach fits your needs best:

Bottom-Up Capacity Planning breaks down your project into smaller tasks, and assigns said tasks to each team member that will be responsible for delivering the work. It’s very precise, and provides great short term insight into what each team member will be working on on a given day.

Here is what that may look like:

Website Project 1

Top-Down Capacity Planning is the more broad approach that has you create higher level estimates about projects, often rolling tasks up into broader categories (teams, departments, etc., we call them Role Categories) to get an overall view of your capacity.

Short Term Capacity Planning

To get an idea of short term (this week, next week, this month) capacity, you’re going to want to focus on Bottom-Up forecasting. Remember, that’s listing out all of the tasks needed to complete a given project, assigning them out to your individual contributors and adding approximate time estimates for each task. This will give you an idea of how much of each person’s time is being spent to complete the project(s) that they’ve been assigned to. A broader high level approach won’t give you the answers you need in the short term, but it’s the way to go in the long term.

This method is typically employed for more mature work (confirmed projects that have a clear scope and timeline) and takes place in the project management process. Because it is much more precise, it’s much more difficult to make frequent or material changes to the plan so it’s important not to bog this process down with too broad a time horizon, or with projects that are speculative and immature. Doing so will create a lot of operational drag and is likely to undermine the entire process.

Long term Capacity Planning

By using a Top-Down approach, you’ll be sacrificing some of that precision that you had in Bottom-Up to focus higher level, long term models that are much easier to change and use for simulating different scenarios. The change management of updating each task for each role for each project on a long time horizon is massive – therefore rolling those tasks up to broader segments such as Role Categories will give you a sense of how busy your departments will be and hopefully allow you to act before anything gets out of hand.

This methodology is much better suited for looking at longer time horizons (months, quarters) and dealing with more speculative work that might still be in the sales or contracting process and is susceptible to material changes in scope, budget and/or timeline. It may also not be clear who will be working on the project – all of these changes are much easier to maintain against and simulate using a top-down approach.

Now, knowing the methodologies and models of each method is only half of the battle. The other part is actually putting it to work. Let’s get into how you can actually make this happen.

Top Down Capacity Planning: 4 Steps

Step 1: analyze the demand.

You can start your Top-Down capacity planning process by analyzing your demand. Outline all of the work currently in your pipeline, starting with work that is confirmed and work backwards towards more uncertain work (unconfirmed deals, pipeline deals, etc.)

You can do this at two levels of detail: high level, or detailed level.

You’ll need some form of hourly estimate to put towards each project. The simplest starting point for estimating time required to deliver on deals that are in the pipeline is to convert your revenue into planned hours. This can be done by using the following formula:

Expected AGI / Expected ABR

AGI is “Agency Gross Income” which is your core services revenue minus any Pass-Through Expenses such as white-labeled services, print/ad budgets, etc.

ABR is “Average Billable Rate” which is the measure of how much revenue your team earns for each hour of work. If you don’t know exactly what you’re getting for each hour of work, you can pull up your rate card or standard rate, and plug that into the formula.

For example, if you have a project that you’re expecting will bring in $10,000, and your ABR or standard rate is $170, you have a starting point:

$10,000 / $170 = 58 hours to complete.

There are of course inherent issues with the basic strategy, because it’s too broad. To take this one step further, you can break down this 58 hours into “Role Categories”. A Role Category is a broad group that collects similar tasks and roles into one bucket. For example, an illustrator and an animator working on a website project may be grouped together in a role category called “Design”. 

Try to limit yourself to 5 Role Categories, to deliberately keep things high level. We’ll get more precise when we implement a Bottom-Up practice later on in the post.

Your Role Categories for the same project could look like this:

Step 2: Evaluate Existing Capacity

Next, for Step 2 of your Top-Down method, you’re going to want to model your team’s capacity into the future. Again, you can do this the basic way, or the advanced way.

The simplest starting point is to look at your capacity for the whole agency. You’ll need to figure out how much Delivery Capacity is available for your team (which can be done using our profitability toolkit here ). You can manually calculate this by using the following formula:

Agency Delivery Capacity = Total Capacity x Model Utilization

Where Total Capacity will be each team member’s total hours in a given time period, and model utilization will be what percentage of those hours will be spent on delivering client work (revenue earning activities). 

For example, on an annual basis, you may have a team of 10 that all works 8 hours a day, for 5 days a week, which totals 2080 hours yearly. For 10 employees, that’s a total capacity of 20,800 hours. That will be your agency’s Total Capacity. For your Model Utilization, you’ll need to figure out a realistic but ideal target that your team can hit. A healthy utilization number agency wide (which would include Delivery and non-Delivery team members) would be 50% annually. It would be closer to 60-70% on a per project basis, but let’s stick with 50% for this example.

You can also factor in PTO to this model. Calculate the amount of hours that your team will be taking off (8 hours a day, 20 days a year, let’s say) and we’ll have 160 hours, multiplied by 10 employees. 1600 hours. Then, calculate how many of those hours will be used in Delivery (50%) and we reach a total of 800 hours. This means that 800 of the 10,400 Delivery Capacity should be subtracted to account for PTO.

Psst: The simplest way to model capacity is often to create a “payroll grid”. This means listing all of your delivery and partial delivery employees, along with their weekly capacity and then multiplying that by the number of weeks in a given period.

Want to set benchmarks for your team and agency around utilization? You’d then add delivery/billable expectations and time off / holidays to that grid and model out your capacity and utilization targets for the team.

Want this exact payroll grid template? It’s included for free in our  Agency Profitability Toolkit:

Download the Agency Profitability Toolkit!

Get the same templates & guides we use with consulting clients to get them results fast.

Check your inbox for your free toolkit!

At a very high level, now you know that your team has 9600 hours a year to put towards client work. Monthly, that number looks like ~800. Weekly, ~200. So, if you have a typical project that takes 58 hours to complete, you know that you should be able to take on around 3 of those per week, and have your team still have a bit of breathing room.

58 * 3 = 174 hours / week

Note: by working with Parakeeto , you’d gain access to an agency wide Capacity Graph just like you see below:

The issue with this broad, basic method of capacity planning is that if your planned work in the pipeline is set to exceed the number of Delivery Capacity Available in that time period, all of the sudden you need to hire…but you don’t know which department needs it, since you calculated an agency-wide number.

That’s where the Role Categories come in…

Instead of focusing agency wide, a more detailed version of this top down approach can be done using Role Categories. Then, you’ll be able to identify bottlenecks at a slightly more discrete level than agency-wide, while also keeping the process light and easy to maintain.

Here is what that capacity could look like broken down into Role Categories:

You’ll need to decide on hourly estimates for each Role Category for your service offering, like we have done below.

Website Project X

And then compare them to the planned work that you have in the pipeline for a given time period. If you have 3 website projects happening next week, and each project takes 78 hours to complete, let’s see which Role Categories can handle it, and which can’t:

As you can see, with 3 projects planned for a given time period (in this case, an upcoming week) the development team is going to be short-staffed. The Design team should (in this model) have enough capacity to take on three projects that week. The strategy team could actually handle twice the amount of work.

Step 3: Identify the Gap

Now, for the easy part! Now that you have an idea of how to lay out all of these numbers, you can compare planned hours to your delivery capacity, and make decisions based on that. Any over-staffed areas may require adjustments, or a sales push to improve utilization. An under-staffed area may require a new hire or freelance resources to be brought in to weather the storm.

As noted above, the website design & development agency in our example can use these numbers at a high level to plan future hires and freelancing needs ahead of time. In this specific example, it might mean bringing in an outsourced development team, to help with that bottleneck.

Step 4: Implement and Monitor Capacity Plan

Finally, comes the ongoing part of this process. Capacity planning isn’t something you do once and you’re good. You’ll need to be continually monitoring these numbers, gathering inputs from multiple sources, and making decisions based on what the numbers are telling you (and even what your people are telling you!). 

You’ll need to install a cadence where each team member can contribute their inputs to the system (usually through a well-deployed time tracking system) and ensure it’s being used properly (without time tracking compliance, this system is useless). 

Bottom Up Capacity Planning

Let’s go through the step-by-step process, this time focusing bottom up, which is much more precise, ideally for a short time horizon.

First, you’ll want to start by getting an idea of what confirmed work you have in the pipeline. These projects will need to have a clear scope and timeline, otherwise this won’t be successful.

Break down the whole project into individual tasks, and assign hourly estimates to each one. You’ll also want to outline the deadline or time range for each task to be completed within.

This could look like the following for the onboarding phase of your project:

Next, you’ll then need to figure out how much of each team member’s time you have available to fill up with client work. A simply capacity calculation like we did in the Top-Down section will get you the answer you need:

Emily’s Capacity

Weekly, Emily has 26 hours to put towards client work. 

You can manage all of these metrics in a bottom up resource planning software (as seen in the example above) such as:

• Harvest Forecast

Step 3: Identify the Gaps

Next, you’ll identify the gaps. If you have the following for each project:

And you have the following capacity for each team member:

After comparing each team member to the hours available each week, vs the hours you’ll need per project, you’ll start to notice some gaps. Here, we see what Emily and Sasha have 26 hours a week available for Delivery work. Emily only needs 5 hours per project, so theoretically speaking she could handle 5 projects per week. 

Sasha on the other hand needs around 12 hours per project, only allowing him to handle 2 projects per week. Ben can handle about one per week. This might mean that you’ll need to hire more members to support roles that Sasha and Ben are doing, to ramp up the throughput. It also might mean you’ll need to restructure Emily’s role so that not so much of her time is being wasted by not being able to fill up her capacity each week.

This kind of technique can help us identify shorter-term risks and help avoid overworking the team. It will also help in finding opportunities to balance workloads with less utilized team members.

Step 4: Implement and Monitor

And of course, similar to the Top-Down approach, you’ll want to install a cadence where you can continually monitor your estimates, monitor time tracking compliance, and so on, so that you can rely on the data to help you make better decisions.

Importance and Benefits of Capacity Planning

Capacity planning of course has many benefits. Firstly, it helps companies avoid the classic resource problem—no more wasting time and money on too much stuff that’s just sitting around, or scrambling to keep up when things get busy. It’s like having a crystal ball to predict just how much you need.

Not only does it keep everything running smoothly, but it also keeps customers happy and satisfied. You know how frustrating it is to wait forever for a service or product? Well, with capacity planning, that’s ancient history! Businesses can keep their promises and deliver on time, every time.

Not to mention – the performance increase. It helps businesses manage costs and boost their profits by being super efficient with their resources.

Challenges in Capacity Planning and How to Overcome Them

You’re likely to encounter a few common challenges in your capacity planning journey.

Inaccurate Forecasts

The whole point of planning your capacity is to be able to rely on these reports. But, there are times that come where your report was wrong. You can start to troubleshoot your reports by revisiting your review cadence. Ask yourself:

• Is something like this built into our project retrospective cadence?
• How might this be impacting the numbers?

And once you identify areas that may have been slipping them, run your numbers again. If they’re still off – consider what the numbers are trying to tell you. If you’re consistently hearing that your team has too much work, that might be telling you that your estimates need to be tweaked, as projects are taking longer than anticipated. It might also indicate an issue with your workflow/process.

Rapid Growth

In an ideal world where your agency is scaling, you’re going to be consistently outgrowing your previous internal reporting systems. The same goes for your capacity planning process.

As the business grows and becomes more complex, the feasibility of super granular reports wanes. Tweak your capacity plan to focus not only on precision but more importantly on accuracy. If the reports aren’t correct, all of this work is for nothing. As you scale, it will become increasingly important to create adequate separation between bottom-up and top-down planning so that all the stakeholders in the business are enabled to plan ahead without being constrained by each other.

In conclusion, capacity planning is a crucial function that empowers businesses to look into the future and anticipate their team’s needs, enabling effective decision-making in staffing and timelines. By employing various strategies like top-down and bottom-up forecasting, businesses can gain valuable insights into their project management and resource allocation.

Implementing a robust capacity plan ensures that your project and operations teams thrive, resulting in improved efficiency, better customer satisfaction, and increased profitability. However, capacity planning does come with its challenges, such as inaccurate forecasts and the need to adapt to rapid growth. To overcome these challenges, regular review and adjustments in the planning process are essential.

In a dynamic and ever-changing business landscape, capacity planning serves as a vital tool, providing organizations with the foresight they need to optimize their resources, deliver projects on time, and stay ahead of the competition. Embracing this proactive approach to resource management can ultimately lead to sustainable success and growth in the long run. So, take the time to invest in capacity planning and watch your business reach new heights of efficiency and success.

Related Posts

How to price, deliver & sell performance-based retainers, with chris rudolph — ep. 139.

Last updated Apr 25, 2024

About this Episode In this episode of the Agency Profit Podcast, host Marcel Petitpas and guest Chris Rudolph, Founder @ The Freedom Agency Coach dive into the nitty-gritty of performance-based retainers for agency services. Chris, a seasoned business coach with a...

Unlocking Profits with Recurring Services with Pete Everitt — Ep.138

Last updated Apr 3, 2024

About this Episode Marcel Petitpas catches up with Pete Everitt, a multi-agency owner, a coach known for helping agency owners grow their businesses through recurring revenue models and the Co-Founder of SEOHive. They reminisce about their last meeting and marvel at...

Building Systems That Grow with Your Agency, with David Jenyns — Ep. 137

Last updated Mar 20, 2024

About this Episode In this latest episode of the Agency Profit Podcast, Marcel Petitpas chats with David Jenyns, the brains behind the bestselling book SYSTEMology. They dive deep into the world of streamlining your business with killer systems. David shares insights...

Get the Agency Profit Toolkit

The free tools, templates and training videos you need to measure the right metrics and improve your profitability.

Submit a Comment Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Submit Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed .

Related Articles

• Finance, Accounting & Economics
• Global Business Management
• Management, Leadership & Organisation
• Marketing & Sales
• Technology & Operations

• Request Free Trial

Notifications

Share these talks and lectures with your colleagues

Welcome Guest

Login via your organisation, we noted you are experiencing viewing problems.

• Check with your IT department that JWPlatform, JWPlayer and Amazon AWS & CloudFront are not being blocked by your network. The relevant domains are *.jwplatform.com, *.jwpsrv.com, *.jwpcdn.com, jwpltx.com, jwpsrv.a.ssl.fastly.net, *.amazonaws.com and *.cloudfront.net. The relevant ports are 80 and 443.
• Check the following talk links to see which ones work correctly: Auto Mode HTTP Progressive Download Send us your results from the above test links at [email protected] and we will contact you with further advice on troubleshooting your viewing problems.
• No luck yet? More tips for troubleshooting viewing issues
• Contact HST Support [email protected]
• Please review our troubleshooting guide for tips and advice on resolving your viewing problems .
• For additional help, please don't hesitate to contact HST support [email protected]

We hope you have enjoyed this limited-length demo

• Request free trial
• Recommend to your librarian

Share This Lecture

• Replay Talk
• Further Action

Bite-size Information

This case study describes capacity planning at Intel. By dividing capacity planning into three distinct but interconnected planning phases and revisiting its long-range planning process quarterly, Intel has been able to plan successfully in the volatile world of computer processing. Because Intel believes capacity planning to be a key driver of its success it allocates significant resources to the practice.

Printable Handouts

Navigable slide index.

• Introduction
• Capacity planning at Intel
• Intel's long-range planning process
• Intel's long-range organizational structure

This material is restricted to subscribers.

Request Free Trial or Login

Talk Citation

Publication history.

• Published on June 27, 2018

Intel: a case study in capacity planning and strategy

• Prof. Brian Tomlin – Tuck School of Business, Dartmouth College, USA

Share This Talk

Additional bite-size case studies.

• Prof. Dimitrios Buhalis
• Bournemouth University, UK

• Dr. Janet Godsell
• University of Warwick, UK

• Ms. Andrea Nicholas
• Green Business, UK

• Mr. Andrew Campbell
• Ashridge Business School, UK

• Add to My Library
• Add to Watch Later

Personal Account Required

To use this function , you need to be signed in with a personal account.

If you already have a personal account, please login here .

Otherwise you may sign up now for a personal account.

Cookies and Privacy

We use cookies, and similar tools, to improve the way this site functions, to track browsing patterns and enable marketing. For more information read our cookie policy and privacy policy .

Cookie Settings

How cookies are used.

Cookies are of the following types:

• Essential to make the site function.
• Used to analyse and improve visitor experience.

For more information see our Cookie Policy.

Some types of cookies can be disabled by you but doing so may adversely affect functionality. Please see below:

Essential Cookies

If you block these cookies or set alerts in your browser parts of the website will not work.

Functional Cookies

Cookies that provide enhanced functionality and personalisation. If not allowed functionality may be impaired.

Performance Cookies

Cookies that count and track visits and on website activity enabling us to organise the website to optimise the experience of users. They may be blocked without immediate adverse effect.

Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.

7 Strategic Capacity Planning

Learning Objectives

• What are common capacity strategies?
• Calculate efficiency and utilization measures.
• Describe factors that determine effective capacity.
• Understand the steps in the capacity planning process.
• Determine the capacity in a sequential process with a bottleneck.
• Use break even analysis to evaluate capacity alternatives.

This module examines how important strategic capacity planning is for products and services. The overall objective of strategic capacity planning is to reach an optimal level where production capabilities meet demand. Capacity needs include equipment, space, and employee skills. If production capabilities are not meeting demand, it will result in higher costs, strains on resources, and possible customer loss. It is important to note that capacity planning has many long-term concerns given the long-term commitment of resources.

Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies include  leading capacity , where capacity is increased to meet expected demand, and  following capacity , where companies wait for demand increases before expanding capabilities. A third approach is  tracking capacity , which adds incremental capacity over time to meet demand.

Finally, the two most useful functions of capacity planning are design capacity and effective capacity.  Design capacity  refers to the maximum designed capacity or output rate and the  effective capacity is the design capacity minus personal and other allowances. These two functions of capacity can be used to find the efficiency and utilization. These are calculated by the formulas below:

Efficiency = (Actual Output / Effective Capacity) x 100%

Utilization = (Actual Output / Design Capacity) x 100%

                                        Effective Capacity = Design Capacity – allowances

Actual production last week = 25,000 units

Effective capacity = 28,000 units

Design capacity = 230 units per hour

Factory operates 7 days / week, three 8-hour shifts

• What is the design capacity for one week?
• Calculate the efficiency and utilization rates.

(Using the formulas above)

• Design capacity = (7 x 3 x 8) x (230) = 38,640 units per week
• Utilization = 25,000 / 38,640 = 64.7% Efficiency = 25,000 / 28,000 = 89.3%

Capacity Planning for Products and Services

Capacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short- term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand.

Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs. Capacity can be broken down in two categories: Design Capacity and Effective Capacity.

Three key inputs to capacity planning are:

• The kind of capacity that will be needed
• How much capacity will be needed?
• When will it be needed?

Defining and Measuring Capacity

When selecting a measure of capacity, it is best to choose one that doesn’t need updating. For example, dollar amounts are often a poor measure of capacity (e.g., a restaurant may have capacity of $1 million of sales a year) because price changes over time necessitate updating of that measure.

When dealing with more than one product, it is best to measure capacity in terms of each product. For example, the capacity of a firm is to either produce 100 microwaves or 75 refrigerators. This is less confusing than just saying the capacity is 100 or 75. Another method of measuring capacity is by referring to the availability of inputs. This is usually more helpful if we are dealing with several type of output. Note that one specific measure of capacity can’t be used in all situations; it needs to be tailored to the specific situation at hand. The following table shows examples of both output and input used for capacity measures.

Determinants of Effective Capacity

• Facilities: The size and provision for expansion are key in the design of facilities. Other facility factors include locational factors, such as transportation costs, distance to market, labor supply, and energy sources. The layout of the work area can determine how smoothly work can be performed.
• Product and Service Factors:  The more uniform the output, the more opportunities there are for standardization of methods and materials . This leads to greater capacity.
• Process Factors:  Quantity capability is an important determinant of capacity, but so is output quality. If the quality does not meet standards, then output rate decreases because of need of inspection and rework activities. Process improvements that increase quality and productivity can result in increased capacity. Another process factor to consider is the time it takes to change over equipment settings for different products or services.
• Human Factors:  the tasks that are needed in certain jobs, the array of activities involved, and the training, skill, and experience required to perform a job all affect the potential and actual output. Employee motivation, absenteeism, and labour turnover all affect the output rate as well.
• Policy Factors:  Management policy can affect capacity by allowing or disallowing capacity options such as overtime or second or third shifts
• Operational Factors:  Scheduling problems may occur when an organization has differences in equipment capabilities among different pieces of equipment or differences in job requirements. Other areas of impact on effective capacity include inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures.
• Supply Chain Factors:  Questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle the increase? If capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain?
• External Factors:  Minimum quality and performance standards can restrict management’s options for increasing and using capacity.

Inadequate planning can be a major limitation in determining the effective capacity.

The most important parts of effective capacity are process and human factors. Process factors must be efficient and must operate smoothly. If not, the rate of output will dramatically decrease. They must be motivated and have a low absenteeism and labour turnover. In resolving constraint issues, all possible alternative solutions must be evaluated.

• Estimate future capacity requirements
• Evaluate existing capacity and facilities and identify gaps
• Identify alternatives for meeting requirements
• Conduct financial analyses of each alternative
• Assess key qualitative issues for each alternative
• Select the alternative to pursue that will be best in the long term
• Implement the selected alternative
• Monitor results

The above content is an adaptation of Saylor Academy’s BUS300 course. [1]

The Sequential Processes and the Bottleneck

Any process that has several steps, one after another, is considered a sequential process . A good example of these processes is the manufacturing assembly line in which each workstation gets inputs from a previous workstation and give its outputs to the next workstation. It is safe to assume that each step has its own staff member, since this is exactly what happens in assembly lines. For this kind of process, it is crucial to have a balanced time across all steps. That is, there should not be any big difference between the amounts of time that different steps take to process one unit of product. For example, if step 1, 2 and 3 take 3, 10 and 5 minutes consecutively to process one unit of product, two main issues will happen during the production:

1) There will be a big pile of inventory sitting right before step 2, since step 1 is much faster than step 2, and the products that are already processed in step 1 will need to wait for step 2 to be done with its current unit at hand. As a result, this becomes an inventory holding issue, which is costly.

2) Step 3 will always need to wait for step 2 for an extra 5 minutes. This is due to the fact that step 3 finished its current product at hand in 5 minutes, but step 2 needs a total of 10 minutes to finish its work and feed it to step 3. This causes step 3 to be idle for a long time, which is also costly for the company. This is costly, because the company is already paying the staff who works in step 3 for the whole time, but they are not able to produce as many units as they should due to the very slow entry of the inputs coming from step 2.

The bottleneck is the slowest step in each process or the slowest process in a system. The capacity of the bottleneck defines the capacity of the whole process. In our example above, step 2 was the slowest, and as a result, the bottleneck. This means that the whole process (including all steps 1 to 3) will not be able to have an output any faster than one every 10 minutes. In the following, let’s see why this is happening:

In an 8-hour shift per day, we have 8 x 60 = 480 minutes

Assuming that step 1 has enough input to process during the day, the total output from step 1 will be 480 / 3 = 160 units per day. This is the capacity for step 1. In a similar way, the capacity for step 2 is 480 / 10 = 48, and the capacity for step 3 is 480 / 5 = 96 units.

This means that the input to step 2 will be 160 units to be processed. But as we see, step 2 will only be able to process a maximum of 48 units per day. That means that only 48 units get to step 3 for processing. Since step 3 has a capacity of 96 units per day, it will easily process those 48 units of inputs, and the output from step 3 will be 48 units. Because the step 3 is the last step of our process, this output of 48 units will automatically be the total output of the whole process per day.

The key observation here is that the capacity of step 2, which is the bottleneck, determined the capacity of the whole process. This concept is very important in practice. Often times, the companies that do not pay attention to the concept of bottleneck and its implications invest in parts of the process that are not bottleneck. This will keep the bottleneck unchanged and as a result, they will not see any improvement in the capacity of the whole process.

Caroline has a thriving business selling her tote bags through several popular websites.  Her business volume has caused her to hire full-time employees. Her business has four main manufacturing operations: 1) cutting fabric (4 min), 2) stitching fabric (7 min), 3) adding zippers, toggles, and liner (10 min), and 4) inspecting, packing, and labeling (5 min).

Employees work 7 hours per day. Help Caroline to determine the following:

• Based on her very high demand, is there a bottleneck and what stage is it? What is the capacity of the process per day?
• Caroline’s employee at step #2 has found a new machine that will enable him to do the stitching faster, at a rate of 5 min per bag instead of 7 min. The machine costs $3500. Would you suggest this is a good investment to help Caroline increase her output? Why or why not?
• If there were another person to be added to the process, where should Caroline add him or her and what would be the new capacity?

(Based on 7×60 = 420 min per day)

Accessible format for Figure 4.4

• The maximum output is 42 units, because that is what the bottleneck can do. The bottleneck is at stage #3, which is the slowest part of the process.
• Caroline should NOT invest any funds into step #2. This may speed up the stitching, but the maximum output of the process will still be 42 units because step #3 has not changed.
• If Caroline added another person, she should add it to step #3. (Install zippers/ toggles/ liner). Because that is where the bottleneck is. The capacity at stage three would now double to 84 units per day. The new capacity for the whole process would now be 60 units per day, as determined by Step 2 (Basic stitching) which is the new bottleneck of the process.

Evaluating Capacity Alternatives

There are two major ways to evaluate the capacity alternatives to select the best one: economic and non-economic.

Economic considerations take into account the cost, useful life, compatibility and revenue for each alternative. Techniques used for evaluation are:

• Break Even Analysis (this is the only one discussed in this chapter)
• Payback Period
• Net Present Value

Non-economic considerations include public opinion, reactions from employees and community pressure.

Break Even Analysis

Basically, since there is usually a fixed cost (FC) associated with the usage of a capacity, we look for the right quantity of output that gives us enough total revenue (TR) to cover for the total cost (TC) that we have to incur. This quantity is called Break-Even Point (BEP), Break-Even Quantity (Q BEP ).

Total cost is the summation of the fixed cost and the total variable cost (VC, which depends on the quantity of output). In other words, at  Q BEP , we have: TC = FC + VC

A list of relevant notation can be found below:

TC = total cost FC = total fixed cost VC = total variable cost TR = total revenue v = variable cost per unit R = revenue per unit Q = volume of output Q BEP   = break even volume P = profit

Fixed cost is regardless of the quantity of output. Some examples of fixed costs are rental costs, property taxes, equipment costs, heating and cooling expenses, and certain administrative costs

With the above notation and some simplification in the calculation, we have:

TC  =  FC  +  VC VC  = Q x v TR = Q x r P = TR – TC = Q x r – ( FC + Q x v ) Q BE P = FC / ( r – v )

The management of a pizza place would like to add a new line of small pizza, which will require leasing a new equipment for a monthly payment of $4,000. Variable costs would be $4 per pizza, and pizzas would retail for $9 each.

• How many pizzas must be sold per month in order to break even?
• What would the profit (loss) be if 1200 pizzas are made and sold in a month?
• How many pizzas must be sold to realize a profit of $10,000 per month?
• If demand is expected to be 700 pizzas per month, will this be a profitable investment?
• Q BEP = FC / ( r – v ) = 4000 / (9 – 4) = 800 pizzas per month
• total revenue – total cost = 1200 x 9 – 1200 x 4 = $6000 (i.e. a profit)
• P = $10000 = Q ( r – v ) – FC ; Solving for Q will give us: Q = (10000 + 4000) / (9 – 4) = 2800
• Producing less than 800 (i.e. Q BEP ) pizzas will bring in a loss. Since 700 < 800 ( Q BEP ), it is not a profitable investment.

Finding a break-even point between “make” or “buy” decisions:

Question: For what quantities would buying the product be preferred to making it in-house? For quantities larger than the break-even quantity or for smaller ones?

v m = per unit variable cost of “make” v b = per unit variable cost of “buy”

total cost of “make” = total cost of “buy” = Q x v m + FC = Q x v b = FC = Q x v b – Q x v m = Q = FC / ( v b – v m )

The ABX Company has developed a new product and is wondering if they should make this product in-house or have a capable supplier make the product for them. The costs associated with each option are provided in the following table:

• What is the break-even quantity at which the company will be indifferent between the two options?
• If the annual demand for the new product is estimated at 1000 units, should the company make or buy the product?
• For what range of demand volume it will be better to make the product in-house?
• Q BEP = FC / ( v b – v m ) = 160,000 / (150 – 100) = 3200
• Total cost of “make” = 1000 x 100 + 160,000 = $260,000; Total cost of “buy” = 1000 x 150 = $150,000 Thus, it will be better to buy since it will be less costly in total.
• It will always be better to use the option with the lower variable cost for quantities greater than the break-even quantity. This can also be proven as follows:

We want “make” to be better than “buy” in this part of the question. Thus, for any quantity Q , we need to have:

Total cost of “make” < Total cost of “buy” = 160,000 + 100 Q < 150 Q = 160,000 < 50 Q = 3200 < Q

Finding a break-even point between two make decisions

Question: For what quantities would machine A be preferred to machine B? For quantities larger that the break-even quantity or for smaller ones?

If we assume the two options for making a product are machine A, with a fixed cost of FC A and a variable cost of v A , and machine B, with a fixed cost of FC B and a variable cost of v B , we have:

total cost of A = total cost of B = Q x v A + FC A = Q x  V B + FC B = FC A  – FC B = Q x V B – Q x V A = Q = ( FC A – FC B ) / ( V B – V A )

In any problem, it is suggested that you write down the total cost of each option and simplify from there to make sure that you do not miss any possible additional cost factors (if any).

The ABX Company has developed a new product and is going to make this product in-house. To be able to do this, they need to get a new equipment to be able to do the special type of processing required by the new product design. They have found two suppliers that sell such equipment. They are wondering which supplier they go ahead with. The costs associated with each option are provide in the following table:

• If the annual demand for the new product is estimated at 1000 units, which supplier should the company use?
• For what range of demand volume each supplier will be better?
• Q BEP = ( FC B – FC A ) / ( v A – v B ) = (200,000 – 160,000) / (150 – 100) = 40,000/50 = 800
• Total cost of Supplier A = 1000 x 150 + 160,000 = $310,000; Total cost of Supplier B = 1000 x 100 + 200,000 = $300,000 Thus, it will be better to go with Supplier B, since it will be less costly in total.

Let’s see for what quantities Supplier B will be better than Supplier A. In that case, for the quantity Q, we need to have:

Total cost of Supplier B  < Total cost of Supplier A = 200,000 + 100 Q < 160,000 + 150 Q = 40,000 < 50 Q = 800 < Q

This means that for quantities above 800 units, Supplier B will be cheaper in total. Thus, for quantities less than 800, Supplier A will be cheaper in total.

• Saylor Academy. (2019). Strategic Capacity Planning in Operations Management. Retrieved on November 4, 2019, from https://learn.saylor.org/mod/page/view.php?id=9282 ↵

Introduction to Operations Management Copyright © by Mary Drane and Hamid Faramarzi is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License , except where otherwise noted.

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

Case study in Capacity Planning: A Tyre Manufacturing Company

A case study in Capacity Planning for a Tyre manufacturing company

Related Papers

International Journal of Management Studies

Shakeb Ahmed

International Journal of Production Economics

Jan Olhager

IFIP Advances in Information and Communication Technology

Swapnil Bhalla

Manufacturing & Service Operations Management

Geert-jan Van Houtum

International Conference on Eurasian Economies 2018

Bobir Tursunov

International Journal of Internet and Enterprise Management

Yoram Koren

E3S Web of Conferences

Dr. Omolayo Ikumapayi

Production is one of the most important activities which guarantee the continued existence of man; however, it comes with its challenges which make it very difficult to meet up the consumer’s demand. In this regard, the system is required by production and manufacturing companies, human resources, and materials to be enhanced by scheduling and planning of production. In addressing this problem of scheduling over a mid-term possibility, material flow and production objectives should be forecast by solving the problems of planning. Only when the production planning problems have been solved then scheduling problems could be addressed. In this work, we relate scheduling with capacity planning in relation to the production of goods and services. Also reviewed the common problems associated with the industry and how they are overcome.

Assoc.Prof. Dr. Mustafa ZİNCİRKIRAN , Asst.Prof.Dr. Hidayet Tiftik

This study aims to put forth the benefits of linear programming technique, which is one of the quantitative decision-making techniques, for the most efficient use of established business capacities. In order to achieve this aim, capacity planning is carried out in a textile enterprise in Istanbul. A market limitation model is developed for optimum use of capacity on the basis of the enterprise’s data of the last three years. According to the model, it is determined that the cutting, ironing and packaging units of the enterprise operate with idle capacity and provide a profit of 29,618,370 Euros. However, a new model has been developed and analyzed in order to ensure that the enterprise manufactures its own products, which are mainly sewed by contract manufacturing. According to the proposed model, it is seen that the enterprise has doubled its profit by increasing it to 57,905,430 Euros.

RELATED PAPERS

Gábor Tüskés

Ahmad Akumali

The Indian Writer E-Journal

Jignesh vidani

Physical Review D

Srimoy Bhattacharya

Diana Patricia Buitrago Melo

Daniel López

International Journal of Systematic and Evolutionary Microbiology

Elena García-valdés

Mehmet Penpecioglu

Kate Irving

Enterprising Education in UK Higher Education

gary mulholland

Jurnal Pendidikan IPA Indonesia

zulfiani zulfiani

Remote. Sens.

Chris G Tzanis

Australian journal of basic and applied sciences

alireza emami

LAURA XIMENA CUBIDES QUINTERO

Jurnal Economia

MUHAMMAD RIZKY NURHADI SETIAWAN

Science, 14 October 2005, v. 310, 258-264

Sergei Ipatov

Journal of Wound, Ostomy and Continence Nursing

Mary luz Llalle ramos

Annals of Geophysics

Osman Nuri Uçan

Journal of Clinical Psychopharmacology

Ross Baldessarini

EFSA Journal

Alena Pechová

英国文凭 成绩单学历认证录取通知书学生卡

Journal of Hydrology

Mustapha Besbes

Journal of Bioprocessing & Biotechniques

Fatima Nader

Microscopy and Microanalysis

steven bradley

•   We're Hiring!
•   Help Center
• Find new research papers in:
• Health Sciences
• Earth Sciences
• Cognitive Science
• Mathematics
• Computer Science
• Academia ©2024

Capacity Planning in Service Industry Research Paper

Executive summary.

Capacity planning plays a key role in the management of an industry. The concept applies in all types businesses to ensure successful determination of the production capacity required by an organization in meeting changing demands for its services and products on its customers and/or clients.

As it would be observed, the role of capacity planning would apply differently in various industries and sectors, depending on the services and products that are offered. There is no doubt that, capacity planning is one of the most effective management tasks that modern businesses should incorporate in their strategic planning processes.

This study examines capacity planning from the perspective of a firm in the service industry. A case study in capacity planning in a service industry has been examined for the purpose of this study, with hotel as the main sector of interest. The report starts with a brief overview of the concept and its importance on businesses.

There are various theoretical as well as conceptual literatures that have ascertained the application and importance of Capacity Planning in business. Some of these literatures have succeeded in establishing important aspects associated with this significant concept of marketing.

A portion of these literatures have been examined with the aim of providing an insight on the trend of Capacity Planning and the significant role it plays in modern industries. There is also a technical section reflecting the actual projects that have been undertaken, together with the research processes applied in getting to the conclusion.

Also examined here are advantages and disadvantages of Capacity Planning in regard with the chosen case, which is based on hotel as a type of service industry. There is an in-depth evaluation of the case to show how the concept of Capacity Planning has been used, and the purpose for which it has been applied in the chosen case.

There is always a summary of findings and recommendations for every research report. In this context, the observed outcomes are described, followed by possible recommendations on what should be improved. Evaluation of the case comes before the conclusion, which closes with a reiteration of the key points.

Introduction

The term capacity, as used in this report, refers to the amount of output resources or productivity that a business can manage to deliver in a specific period of time. Capacity Planning simply refers to the art and science of estimating and determining the capacity that an organization requires in meeting the ever-changing demands of its products and services.

In other words, this significant concept is applied in the business world to help entrepreneurs determine if there would be a need to diversify their operational outputs without having to strain the existing resources.

Some of the primary resources that can be used to conduct capacity management include things such as facilities, labor, and equipment, which are certain to make a contribution towards a company’s productivity and performance.

Capacity planning in business is conducted for four primary reasons and these are; to increase product and service demand, to change environment and technology approaches, to drop demand, and in spotting new business opportunities (Umble, Haft & Umble, 2003).

As it would be observed, the main objective of Capacity planning is to eliminate the discrepancy of inefficiency that may result from imbalances between the capacity of a company and the demands for its consumers.

A typical concern for many companies on the concept of capacity planning is whether significant business or marketing resources will be readily available to contain heightening demands that may be realized as the interactions with customers or clients increase.

For effective planning, capacity planners apply business forecasts and plans to predict what should be expected in the future. In this regard, capacity planning ensures that new capacities are included in the business at an earlier time, to enable the industry meet the anticipated product and service demands.

There are many advantages that are associated with application of capacity planning in an industry. First of all, the concept serves as a way of sustaining surprise in business. This timely planning also helps companies to invest on important business resources such as leasing of new facilities and purchase of new equipments.

Another benefit of the concept is that, it helps in mapping business objectives into successful outcomes as anticipated by entrepreneurs and the stakeholders. Capacity planning also plays a key role in ensuring reporting of services, which is management oriented.

Industries and companies can monitor costs in the course of high economical times and in recession. This allows businesses to budget and plan for expected changes by incorporating financial resources where necessary.

There is a need for new space and locations as businesses grow. In this regard, business investors would find it easier to discover the need to launch new production facilities, where capacity planning has been applied. Through effective capacity planning, businesses can be certain of developing projection personnel levels and facility needs that are more accurate.

Capacity Planning can also be used in maintaining perfect production levels all year round, particular in the course of anticipated business cycles. According to Staehr and others (2010), Historical business data acquired through capacity planning is a key tool which can be utilized in planning production capacity and ensure there are enough resources to contain the change in demand.

More importantly, this timely planning helps businesses to identify the periods at which recessions are expected, thus taking the necessary steps that need to be applied in order to remain stable and competent in the market.

Apart from production and personnel sectors, the other field where capacity planning can be useful in business is the information sector. Companies, particularly modern ones, do accumulate wide packs of digital information every day. Most of this information is crucial for the growth and success of businesses.

In that regard, effective capacity planning in business plays a significant role in ensuring that there is permanent and safe storage of vital information which is essential in the efficient productivity of industries. Based on the above benefits, capacity planning is a priority that needs to be addressed as a long-term approach that plays a key role in establishing the overall rate or level of resources owned by a company.

As it would be observed, the overall decision of capacity planning or capacity management, as it is known sometimes, would influence various key aspects of business performance. Some of these aspects would include the operating cost, production lead time, the ability of the company to operate and compete with other businesses, and customer responsiveness, among others.

Literature Review

Empirical evidence from past studies by various researchers and scholars has confirmed the ability of capacity planning on investment decisions. There is no doubt that there is no other way by which superior business performances can be achieved in the modern world, except through high levels of capacity planning and management.

No matter how smart and cherished products and services by a particular company would be, no company can reign the global markets without applying the magical concept of strategic business planning.

Good planning enables enterprises to focus on the changing demands of products and services in the market, thus executing their most valuable resources to attract the best business practices expected in the market (Lengnick-Hall, Lengnick-Hall, & Abdinnour-Helm, 2004).

For many years now, investors have come to see the benefit of this business idea as a very reliable tool that can be used to outline the equipment and personnel that are necessary in helping their businesses grow. Development of financial projections have proved to be an easy deal for many companies, since future expenses can closely be estimated and predicted through capacity management and planning.

The concept of capacity planning has played a great deal in helping businesses and investments cut costs on normal expenses. Taking the example of the computer technology, component engineers and manufacturers have made life easier and more affordable through the concept of capacity planning.

To emphasize on this fact, various computer parts such as the memory and processors can be upgraded for future application, and this is the best capacity planning which has ever been realized in the technology industry. Through this idea, people will not have to budget for new purchases, whenever one of their machines threatens to go down, but they can just upgrade them and save extra cost on new purchases.

Capacity planning is an integral part of business planning and management simply because it aids industries and businesses advance in regard with the projections they have established (Schuler & MacMillan, 2006).

No matter the levels of the business projections that businesses could make regarding their investment plans, capacity planning will make things easier for them through manufacturing projection, facility planning, and personnel planning.

The idea of capacity planning is known to have facilitated processes that are more efficient for enterprise success, thus placing many companies on a strong competitive edge (Occhino, 2010).

Through comprehensive capacity plans, competent investors in the world have got used to setting higher goals for them in the business world, and they have always gone ahead to achieve them. Over the last few decades, focused businesses from different industries have managed to gain long term competitive advantage over their rivals in the market, as a result of strategic planning achieved through capacity planning.

Capacity planning, management, and forecasting directly addresses the needs and success of industries, and their timely incorporation in business could encourage and facilitate smart utilization of resources and capital (Flynn, Schroeder, & Sakakibara, 1995).

Unlike in the past, when planning tasks were performed with paper spreadsheets and electronic calculators, things have become much easier nowadays, with the modern advancement of computer technology, where technology-enabled planning practices can be applied to process efficient planning data and information.

This revolution has acted as a major push for strategic business planning and management practices, thus encouraging full participation of entrepreneurs in comprehensive enterprise planning. This has not only helped to translate strategic business objectives and goals into operational targets, but has also equipped modern businesses with the ability required to thrive in the fast-paced business environment of today.

Technical Part – The Research Project

Hospitality is known to be capacity-constraint service industry, and for that reason, hotel has been as the area of interest for this study. Capacity in this type of industry can be assessed using information and data that are relevant to the service itself, such as the number of customers or clients that are served within a given period of time or the number of tables that are available for customers (Seddon, Calvert & Yang, 2010).

Likewise, capacity planning in this form of service industry would be conducted using the same aspects. For the purpose of this study, an actual research project was undertaken to determine the role of capacity planning in the field of interest i.e. service industry, and particularly hotels. Following is a summary of the research proposal carried out for this project.

Objective of the Research

The main objective of the research was to ascertain the importance of capacity planning in business, particularly in the service industry. Another objective of the study was to evaluate the application of this strategic tool of management in today’s business world.

Research Hypothesis

Capacity planning is a key management task in the service industry.

Research Question

The main research question in the study was to observe and determine whether capacity planning has any impact on a business within the service industry.

Study Methodologies

Both quantitative and qualitative methodologies were applied in this study, to determine the application as well as the impact of capacity planning in the hotel service industry. These were the most suitable methodologies to apply here, since the approaches used in collecting data and information would be combined to generate unbiased results.

In this regard, each of the two methodologies was applied independently in the study, before a comparison was done on the outcomes to improve the credibility of the findings. As it would be observed, each of the two methodologies had its advantages and disadvantages. For instance, talking of advantages, quantitative was appropriate for this study, since its application mainly focused on analysis of numerical data and statistics.

This way, answers to some questions related to the study hypothesis were sampled from selected participants to ascertain the variable of the overall findings. Through quantitative methodology, it was easier to sample information for the final analysis of the outcome using statistical approaches.

Study Population

This study was carried out in the U.S. with the main participants being drawn randomly from seven states, where a total of 300 workers from small and big hotels were featured. Over eighty percent of these participants were people with distinctive reputations in the hospitality sector.

Applied Research Model and Design

Survey proved to be the most appropriate research model to use in the study. Here, all the participants were taken through a structured interview session that was conducted on a face-to-face medium. This form of inter-personal interaction with the participants was the most suitable model of survey to employ in this context, considering it high flexibility nature.

Talking of the design, questionnaires were used to get information from the selected participants, through a simple random sampling method. In this case, each participant would have an equal chance of getting selected for the interview. This would help in eradicating any possible cases of bias that could have risen from the research findings.

Limitations

Although the study had proved successful in achieving its aims, there were various uncontrollable aspects witnessed in the course of the project whose impact must have interfered with quality of the potential outcome of the research.

For instance, there were some cases when the interviewers were forced to interview people in groups, especially when the members came from the same company, and this may have interfered with the efficiency and quality of the feedback received.

Another limitation here was that, the 300 research participants were drawn from only 15 hospitality companies, and this number could not have been enough to generate the best results for this study.

Data analysis and Interpretation for this study was carried out using two methods for the purpose of comparison. These methods are; software application and manual methods.

Using the SPSS software application, it was easier for the researchers to come up with a tabulated report on the feedback given by the participants through the questionnaires. As it was observed from this study, more than three-quarters of the participants had expressed ideas confirming the research hypothesis.

Suggested solution

Based on the findings of this study, effective capacity planning is an essential tool for business success. This does not only place entrepreneurs on the safer side of marketing, but it makes them more alert on the many important issues surrounding them in business.

Case Study– Advantages and Disadvantages

The real case chosen for the purpose of this study is a case study showing how Hilton Hotels have achieved excellence through capacity planning. Some of the notable advantages from this case that have been realized by the company include high profits, improved customer satisfaction, and sustainable competitive advantage in the hospitality sector.

However, there some disadvantages as well, and these would include things such inaccurate predictions resulting from unexpected turn in demands. Another outstanding disadvantage here is that, since capacity practice is a long term process, Hilton Hotels have constantly used it in their management process, thus ending up spending excess workloads of resources for this task alone.

Evaluation of the Case

This case study shows how Hilton Hotels uses capacity planning as a road map to effective and efficient management of their business. For instance, the case explains how an attempt to become more aggressive in business would enable the company to realize new business opportunities in other fields such the gaming industry.

There is also a detailed report of how the company applied capacity planning, among other management practices to predict the demands of its customers and clients allover the world. This, according to the case would help them come up with the necessary plans that would help them focus on the needs of their many customers, thus improving customer services in all levels of accountability.

Through these interventions, Hilton Hotels were able to realize increased marketing opportunity in the service industry. It is also evident from the case that, Hilton Hotels have diversified their services in over fifty countries worldwide, and this great success has been realized as a result of effective capacity planning.

Summary of findings and Recommendations

Based on the observations of this study report, capacity planning and management is a significant tool whose role in business cannot be overestimated. The practice helps entrepreneurs come up with the best decisions regarding the use of available resources in their businesses. More importantly, it helps them predict requirements of business resources, thus preparing early in advance for any changes that may present.

As it would be observed from previous studies on this topic, capacity planning integrates with other key business practices such as performance management to offer acceptable service levels to consumers. In this respect, it would be good for entrepreneurs in all industries to embrace the best practices of capacity planning, so as to be able to offer satisfactory products and services to their customers and clients.

As it is observable from this report, this research has successfully achieved the intended goal. First of all, it has set ground on capacity planning and its importance on businesses. The objective of the study has been emphasized in the conceptual framework, which highlights previous views and opinions by experts in the field.

The main objective of this research is to examine capacity planning as it applies in a service industry, and this goal is well-achieved through out the report.

Capacity planning is still a priority in today’s business world, and this is emphasized in the featured research where the study hypothesis has been confirmed. Based on the observations of this study, capacity planning is the management tool required to connect entrepreneurs with the customers.

Flynn, B., Schroeder, R., & Sakakibara, S. (1995). The impact of quality management practices on performance and competitive advantage. Decision Sciences, 26( 5), 659-691.

Lengnick-Hall, C., Lengnick-Hall, M., & Abdinnour-Helm, S. (2004). The role of social and intellectual capital in achieving competitive advantage through enterprise resource planning (ERP) systems. Journal of Engineering and Technology Management, 21 (4), 307-330.

Occhino, T. (2010). Capacity planning model: the important inputs, formulas, and benefits: Advanced Semiconductor Manufacturing Conference and Workshop . New York: IEEE/SEMI.

Schuler, R., & MacMillan, I. (2006). Gaining competitive advantage through human resource management practices. Human Resource Management, 23 (3), 241- 255.

Seddon, P., Calvert, C., & Yang, S. (2010). A Multi-project model of key factors affecting organizational benefits from enterprise systems. MIS quarterly, 34 (2), 305-328.

Staehr et al. (2010). Understanding the business benefits of enterprise resource planning systems: Proceedings of the 8th Americas Conference on Information Systems. Texas: Dallas Publishers.

Umble, E., Haft, R., & Umble, M. (2003). Enterprise resource planning: Implementation procedures and critical success factors. European Journal of Operational Research, 146 (2), 241-257.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2023, May 25). Capacity Planning in Service Industry. https://ivypanda.com/essays/case-study-in-capacity-planning-in-service-industry/

"Capacity Planning in Service Industry." IvyPanda , 25 May 2023, ivypanda.com/essays/case-study-in-capacity-planning-in-service-industry/.

IvyPanda . (2023) 'Capacity Planning in Service Industry'. 25 May.

IvyPanda . 2023. "Capacity Planning in Service Industry." May 25, 2023. https://ivypanda.com/essays/case-study-in-capacity-planning-in-service-industry/.

1. IvyPanda . "Capacity Planning in Service Industry." May 25, 2023. https://ivypanda.com/essays/case-study-in-capacity-planning-in-service-industry/.

Bibliography

IvyPanda . "Capacity Planning in Service Industry." May 25, 2023. https://ivypanda.com/essays/case-study-in-capacity-planning-in-service-industry/.

• Entrepreneurs and the Entrepreneurship Process
• Hotel Franchisor Industry
• Problems Faced by Women Entrepreneurs in the UAE
• The Areas of Organisational Behaviour: Culture, Misbehaviour and Change
• Business Trips & Residence in Caracas: Associated Security Risks
• Analysis of the production processes of beads production at Beads R Us
• Consumer Decision-Making Models: Smith v. Howard and Sheth
• Organizational Challenges and the Role of Leadership