What is capacity planning?

Capacity planning, also known as capacity requirement planning (CRP), is a strategic process used to determine the resources—team members, tools, raw materials—needed for an organization to support demand for its products. Capacity planning relies on a company’s data to make informed predictions. This can include historical project data, customer behavior, and industry or market research.

The objective of capacity planning is to ensure an efficient workflow, with the right level of resources available whenever needed. It aims to minimize idle resources, overproduction, and resource or product shortages.

Types of capacity planning

Capacity planning can be broken down by resource type. Resources are anything that determines your organization’s ability to provide your product or service.

  • Workforce capacity planning: Through this process, you’ll discover your team members’ skills, their availability, whether they are assigned to the right roles, and whether you need more staff. Effective workforce capacity planning helps to establish a motivated, happier workforce—one that has an appropriate workload and is assigned to tasks that best match their skills.
  • Tool capacity planning: Think equipment, specialist machinery, software, digital platforms, vehicles, and transportation. This process helps to establish what tools you have available, where you need to allocate them, and what you might need to fulfill future demand. Is your tool inventory sufficient? Is it being used correctly? Is it worth the investment?
  • Product capacity planning: This type of capacity planning relates to raw materials and supplies. What is available to fulfill orders and deliver finished products in a timely manner? It is particularly relevant to e-commerce businesses, retail businesses, and those in manufacturing—not necessarily those in services.

Capacity planning strategies

There are three main approaches to capacity planning: lead strategy, lag strategy, and match strategy. Each has its merits in different scenarios and conditions.

Lead strategy

This process increases capacity to match anticipated demand growth—organizations proactively acquire resources before they are needed.

Lead strategy meets customer demand immediately, providing a competitive advantage and projecting reliability and preparedness.

However, this approach increases the risk of overcapacity if demand falls short of estimates. It also incurs upfront costs that may take time to recover. Examples of lead strategy capacity planning include:

  • Retailers increasing warehouse and store staffing ahead of Black Friday and Christmas
  • Electric vehicle manufacturers scaling up production ahead of new government initiatives and anticipated growth in EV demand
  • Hospitals building new wings or facilities in anticipation of demographic changes, such as an aging population
  • Telecoms organizations laying 5G infrastructure before widespread adoption 

Lag strategy

This is the process of meeting increases (or decreases) in demand as they occur in real time—organizations procure additional resources in response to changes in customer demand or needs.

Lag strategy is characterized by reactive investment after demand is clearly known and established. This strategy minimizes risk and is suited to smaller organizations.

However, this strategy can expose a business to shortages. Lost sales and market share are inevitable if competition is able to service demand immediately. Examples of lag strategy capacity planning include:

  • Cloud services providers scaling up their capacity after securing more contracts
  • Retailers opening new stores in a particular region in response to growing levels of sales elsewhere in the same region
  • Hospitals drafting in contracted medical specialists in the event of a particular medical event or emergency
  • Telecoms organizations using “on call” engineers to respond to unpredictable outages

Match strategy

This process increases capacity as demand starts to grow. Organizations typically acquire resources in a “just-in-time” manner, so they align exactly with needs.

Capacity adjusts incrementally in small steps in response to changes in demand. By blending key elements of lead strategy and lag strategy, match strategy offers a flexible, responsive approach—many regard it as the “best of both worlds.”

However, implementing match strategy can be complex. It demands precise planning, consistent monitoring, reliable data, and a knowledge of market developments. There is potential for miscalculation—for example, demand spikes could arise and overwhelm available capacity. Examples of match strategy capacity planning include:

  • Airlines gradually adding new routes, or using slightly larger planes, to accommodate passenger growth and demand on a certain routes
  • Automotive manufacturers, such as Toyota, employing a “just-in-time” system to increase production lines as vehicle demand increases
  • Logistics businesses expanding delivery routes in response to e-commerce trends and historical data showing growing volumes of sales in a certain region
  • Coffee chains opening new outlets in a city as recent footfall data justifies expansion

Why is capacity planning important?

By aligning resources with demand, capacity planning helps project managers to anticipate bottlenecks, adapt to changing customer demands, and make informed decisions about deployment of resources. Ultimately, it keeps team members happy, keeps projects on track, and helps a business to reach its goals—this encompasses both shorter-term projects and activities and longer-term objectives.

It helps you to meet customer demand

If you don’t have the product or service your customers want, when they want it, they will take their business to a competitor.

Capacity planning helps you to avoid this, revealing how your market operates and enabling you to predict (and react to) changes in demand, potentially by increasing delivery capacity ahead of time.

It gives visibility of resource gaps

By pre-identifying the skills required for a project, you can plan forward and fill skills gaps. You can hire new team members, upskill existing staff, or upgrade specific systems. This enhanced visibility also helps to ensure skill sets align with the company’s broader objectives.

Resource shortages lead to issues, but overcapacity can be similarly problematic. Capacity planning techniques help identify underused teams and outdated skills. This enables you to make better resource decisions and adapt to future needs.

As we established, resources don’t only refer to the people in your team. It can mean the materials and equipment you need to run your business. Capacity planning allows you to track use of these types of resources—like meeting facilities, forklift trucks, hard drive storage, and software seats—and plug gaps.

It matches skills with projects

Effective capacity planning helps you to take pressure off your team and avoid job creep, which happens when there is a lack of human resources. By planning ahead, you can ensure jobs are performed by the right person or people (and at the right seniority level)—which all benefits team morale.

It improves agility and forecasting

A clear understanding of your business’s capacity enables more accurate predictions of workload, outcomes, and finances. You will be better prepared to pivot and adapt to unexpected events (like internal company changes), unforeseen circumstances (such as a competitor launching a new product), and even emergencies (to give an extreme example, a natural disaster).

Being in the habit of regular forecasting also makes future planning more accurate. Over time, gathering and analyzing your data becomes a more effective, efficient process.

It minimizes your costs

Capacity planning helps avoid overprovision (more resources than required) and underprovision (fewer resources than needed). Both of these increase risk and incur unnecessary production costs.

Capacity planning vs. production planning

Capacity planning is a strategy that looks at how it can handle future demand and adapt to change, whereas production planning focuses on the current requirements of the production process. Both sit within operations and share some similarities.

Production planning focuses on developing a plan to deliver products, goods, or services. The process started in manufacturing, but companies of many sizes, industries, and outputs have adopted it—it can benefit healthcare, retail, construction organizations, and more.

This approach ultimately defines the day-to-day activities, minimizes risks, reduces costs, and helps businesses create an efficient production process. The production planning process can be used to:

  • Estimate product demand
  • Identify the materials and resources required for successful delivery
  • Plot out the production schedule
  • Coordinate with suppliers/third parties
  • Allow for quality control
  • Monitor performance

Capacity planning vs. resource planning

Capacity planning considers the organization’s needs from a higher level and its ability to meet upcoming consumer demand. It is broad and strategic, considering the bigger picture at a skill set and team level, helping you to make decisions on hiring resources.

Resource planning, on the other hand, is more detailed, tactical, and granular. It focuses on allocation, coordination and scheduling of certain resources for specific activities of a project, a program, or portfolio.

 

At Planisware, our solutions enhance your capacity planning with data-driven analytics, real-time reporting, and advanced scenario-building. Request a demo today and start your journey towards an efficient, perfectly-planned portfolio.