Capacity management

What Is Capacity Management, And Why Is It Important?

Many businesses run a fine line between profit and loss. It is the smallest of margins that can lead to a business making a large profit, or ending up with a significant loss. The so-called ‘butterfly effect’ is in action here, with certain business decisions leading to a company’s success or failure in a given year.

Resourcing business decisions are crucial to get right for a company’s success. Companies have limited resources for their projects, and therefore, it is important that these resources are used as efficiently as possible.

Demand is another factor that affects a company’s success. In certain seasons, a company may have higher demand for their goods — and in other seasons demand may be lower.

Take an ice-cream shop, for example. They have to amend their material resources, their staffing arrangements, and their hours based on what time of year it is.

The strategy companies use to ensure they have the right mix of resources to meet their current and future needs, is called capacity management. In this article we will take a deeper dive into capacity management, why it is important, how companies can do it, and undertake a short analysis of the best capacity management tools out there.

Capacity management: what does it mean?

What is the capacity of a business? It is simply how many units of a good or service a business is capable of providing. For example, a factory selling toy cars may be capable of producing a maximum of 10,000 cars a day.

The goal of capacity management is to optimize organizational performance by ensuring that the right level of resources are available, while also maximizing resource utilization and minimizing costs.

There are three main components to capacity management:

1. Resource planning: This is the process of determining what resources are needed to support future demand.

2. Capacity utilization: This is the monitoring and managing the use of resources to ensure that they are being used efficiently and effectively.

3. Capacity planning: This is the process of designing and implementing plans to meet future resource needs.

To sum it up in one sentence: we want to maximize the output of a business under all conditions.

Capacity Management Techniques

There are a number of techniques a business can use in order to undertake capacity management correctly. Let’s go through these in greater detail.

Understand and forecast future demand

This includes both short-term and long-term forecasting. Short-term forecasting can be used to plan for things like staffing levels during busy periods. Long-term forecasting can be used to make decisions about things like investing in new production capacity.

This is done by analyzing historical data, as well as current trends. This information can be used to make predictions about future capacity needs, and ensures you purchase the correct amount of stock or raw material in anticipation of the expected demand.

Optimize the usage of resources

This means using the right mix of human, financial, and physical resources to get the job done efficiently. This can be achieved through process improvements, better utilization of technology, and better scheduling.

Labor is often a company’s largest expense, so it is very important to optimize the usage of your employees. As mentioned, better scheduling is one way to achieve this. Consider using scheduling apps like Humanity, WorkTime and Calendly to ensure your employees are as efficient as possible.

This is also about making use of any underutilized resources in the system. This could involve running the system for longer hours, using more machines simultaneously, or training employees to be multi-skilled. For example, a company might decide to run its factory for 24 hours instead of 8 to make use of spare capacity.

Manage capacity constraints

This consists of identifying and addressing bottlenecks in the system that are limiting output. This can be done by redesigning processes, investing in new technology, or adding additional resources.

For example, a manufacturing company might invest in a new production line to increase capacity. They may upgrade their machinery to boost the quantity of units being made, as this may be the limiting factor to the number of goods being produced.

a factory machine

Create spare capacity

The fourth technique is to create spare capacity. This means making sure that there is extra capacity available to meet unexpected demand. This can be done by overstaffing, investing in excess capacity, or using part-time or contract workers.

Outsourcing certain areas of your company’s operations can be a good way to achieve this. Outsourcing happens when businesses bring in outside help to increase capacity. This could involve hiring temporary staff or using the services of another company.

Use Capacity on Demand (COD)

COD is a capacity management technique that is becoming more and more common. It entails a company making capacity available only when it is needed. This can be done by using cloud computing or by renting extra capacity from another company.

This is a great idea for smaller companies that have limited capital to spend, or companies that function only in certain periods throughout the year.

Taking our ice-cream van example once again, the owner may rent a second freezer during the summer — as this is when demand is higher for his goods. This freezer is not required during the winter as demand is lower. As a result, he saves money by making capacity available only when it is needed.

Why is capacity management important?

Businesses need to be able to meet customer demand. If there is not enough capacity to meet demand, this can lead to lost sales and opportunities. On the other hand, if there is too much capacity, this can lead to wasted resources and higher costs.

Capacity management is therefore crucial for businesses in order to ensure that they are able to meet demand while also minimizing costs.

There are several reasons why capacity management is important — let’s break its benefits down into further detail:

  • Helps ensure that resources are available when needed: By planning ahead and monitoring utilization, capacity management can help ensure that the right resources are available when they are needed. This is especially important in times of peak demand or unexpected events.
  • Improves resource utilization: By monitoring utilization and making adjustments as needed, capacity management can help improve resource utilization. This can lead to cost savings and improved performance.
  • Reduces costs: By optimizing resource utilization, capacity management can help reduce costs. For example, by avoiding over-provisioning of resources, an organization can save on costs such as hardware, software, and energy.
a person counting money

What are the best capacity management tools?

There are a number of different capacity management tools available, but the best ones will depend on the specific needs of your business.

Some of the most popular and effective capacity management tools are as follows:

  • Capacity planning software: This type of software helps businesses to plan for future capacity needs by analyzing current and historical data. It works by predicting future demand and then recommending the necessary resources to meet that demand.
  • Load testing tools: These tools are used to test how well a system can handle increased levels of traffic or load. This is important for ensuring that systems will be able to cope with spikes in demand. It works particularly well for websites and apps.
  • Server monitoring tools: These tools track server performance and can help to identify any bottlenecks that might be causing capacity issues.
  • Capacity management services: These are specialized services that can help businesses with all aspects of capacity planning and management.
  • Cloud management tools: These are designed to help businesses optimize their use of cloud resources. They can help with tasks such as monitoring usage, managing costs, and improving performance.
  • IT service management (ITSM) tools: ITSM tools can be used for a variety of tasks related to capacity management, such as monitoring and managing service levels, identifying bottlenecks, and tracking utilization.
programming code on a laptop screen

What can happen if you ignore capacity management?

If you don’t manage capacity effectively, it can lead to a number of problems, including:

  • Poor utilization of resources
  • Wasted expenditure on unnecessary resources
  • Reduced quality of service
  • Missed opportunities to capitalize on market demand.
  • Missed deadlines for your customer
  • Reduced profitability
  • Poor employee morale
  • Potential legal implications.

In other words, capacity management is important because it can help you avoid a lot of common pitfalls that can lead to suboptimal performance in your business.

Keep a wary eye on how your company is undertaking its capacity management responsibilities to avoid issues like these!

Wrapping it up

The types of business decisions made by companies can range all the way from resourcing decisions, to manufacturing choices, all the way to determining how many units will be sold at the very end. These decisions can make or break the success of your business.

Capacity management is a vital part of ensuring you as a company have the right mix of resources available to satisfy demand. Make sure you understand why capacity management is important and consider using some of the above tools and techniques to manage capacity as best as possible.