Today’s digital capabilities are enabling capacity planning to go to new levels.
While capacity planning has been around for a long time, a shift in the supply chain operating model, changes in the competitive landscape, and changing consumer preferences have forced organizations to relook at their antiquated capacity planning process and work towards comprehensive capacity management. For example, outsourcing, which moved supply chains outside of an organization’s four walls, created a greater need for better capacity planning and visibility to ensure the company could optimize its resources and meets strategic goals.
Today’s digital capabilities are enabling capacity planning to go to new levels, linking a company’s strategic plan and corporate objectives with an operational plan to “make it happen.” Capacity planning is a technique to plan optimum resource levels to meet future demand in all market conditions—a tall order. Without the needed resources, investments and capacity are strained, resulting in lost sales and unhappy customers.
Given market demand volatility and the hundreds of unknowns and risk possibilities, the capacity planning process is challenging. The flip side is that a better capacity planning process can not only boost revenue and lower capital requirement but also provide a true competitive advantage.
Experts have identified five levels of capacity planning, with each level designed to meet a specific objective and make specific decisions. These are:
Strategic capacity planning. Tied to the organization’s strategic planning process, strategic capacity planning helps determine the total capacity required to achieve the organization’s long-term growth plan. It should be performed yearly for a 3- to 5-year planning horizon in quarterly or yearly planning intervals. Its objective is to enable leadership to make large capital investment decisions, such as opening a new factory or building new supplier capability.
Annual budget planning. This occurs yearly to define goals and the operating plan for the whole organization for the upcoming financial year. It is an organization-wide process with the supply chain group as one of the participants. Based on demand targets, the supply planning group identifies, in collaboration with procurement, an operating plan to fulfill the demand and correct gaps in current capacities, such as acquiring a new machine or hiring additional labor.
Rough-cut capacity planning. Part of a mature monthly sales and operation process, this planning is performed to highlight demand/supply gaps and assist in filling the gaps between the annual operating plan and current operational plan using different strategies—such as prebuilding to accommodate peak demand and offloading volume to suppliers.
Capacity requirement planning (CRP). CRP is performed to plan individual products to drive a master production schedule (MPS) at an item or SKU level. Its aim is to understand the short-term production plan for the next few months so that procurement can order materials and resources. Its output is used to align sales and production; the customer representative team uses it to make customer promises while plants and vendors use it as an expected production plan to prepare raw materials and resources.
Detailed production planning. This planning uses a master production schedule as input and develops a production plan at the daily-level detail. The output of detailed production planning is shared with the shop floor to schedule production, which drives material release orders to warehouses to draw the material. Detailed production planning is a time- and resource-intensive process; therefore, the focus on detailed production planning is only a 2- to 5-week planning horizon in daily buckets.
Implementing the capacity planning process
Most medium and large companies run some capacity planning process; however, companies need to take a more holistic view and implement the five levels shown in Figure 1 in their process. They need to look from the strategic level at corporate headquarters to detailed daily-level scheduling at factories while integrating other groups in the levels in between.
Organizations can benefit from digitalizing their supply chain, using powerful capabilities such as artificial intelligence and machine learning to automate processes and reduce the need for human intervention.
Clearly, transforming your organization to build a more mature capacity planning process is a long and somewhat complicated journey. You just need to start by enabling the fundamental processes and then follow the five-level capacity planning maturity model, establishing a solid foundation before moving on to the next level.
With a robust multilevel capacity planning process, your organization can regain control of its supply chain and gain the ability to respond to change in our mercurial digital era.
For more on creating a digital supply chain, please reference select chapters of Technology optimization and change management for successful digital supply chains, a pivotal reference source that provides research on the application of digital business transformation programs to improve strategic, tactical, and operational supply chain processes.