3 Types of Capacity Planning Strategies
In most businesses, self evaluation of core competencies is a must for the organization. This helps them to understand their strengths and even gives a fair knowledge about the areas where they need to improve. Most of the successful enterprises have robust operations planning methods and hence businesses become more reliable on them to take key decisions. Reason being that such strategic planning activities depend on mathematical and (to some extent) scientific approach. Likewise, it is of paramount importance for the management to ensure that their strategic planning capabilities are apt, adaptive and fundamentally strong. This blog features about the three main strategies in capacity planning.
One such branch of study of strategic planning is ‘Capacity Planning’. It can be defined as the process of determining the production capacity needed by an organization to meet changing demands for its products.
As an overview, we spoke about the meaning and definition. Now let us understand the 3 main strategies classified under Capacity Planning.
1. Lead Strategy: Adding capacity in anticipation of a very high demand of product. Mostly used to lure consumers and keep them away from competitors. Excess inventory could get produced but the production cycle management balances out this cost. Looking at the table below, we can understand that Week 1 Capacity has been increased by 50 units anticipating the demand of the same amount in Week 4.
2. Lag Strategy: A reactive strategy, this is used to add capacity only when the actual demand is observed and not based on anticipation. More of a conservative strategy in nature, it decreases the risk of wastage however at the same time it may result in stock outs and invite sales loss and low service levels (example: late delivery of goods). Most importantly, it must be known that this strategy is applied when an additional capacity is required after the organization is already running on full capacity or beyond. In the following example, we can observe that there is a need add 5 units in Week 1 over and above the full capacity which was not anticipated. Hence, there was a need to add these 5 units beyond the full capacity of 170 units.
3. Match Strategy: Adding capacity in small amounts with respect to the anticipated demand signals and current market potential of the product. Typically moderate in nature and used by many organizations. Our example exactly talks about this strategy. It clearly shows how the anticipated demand of 100 units in Week 3 has been matched by adding capacities in smaller units in the preceding weeks and being under full capacity limits.
Having an idea about the strategic side of Capacity Planning, we shall further understand its measures and KPIs with a deeper look into how the calculations are derived. Stay tuned and keep reading this space for more.
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