Definition of Capacity:« Back to Glossary Index
Capacity (or maximum output) is one of the most critical aspects of any business. It’s what determines how much work a company can take on and how fast it can grow. But in spite of its importance, few businesses really understand what it is and how to calculate it; it is often mismanaged, or not managed at all, creating significant waste. And while looking at maximum output can reveal a wealth of information that might make future endeavors more successful, that information is meaningless if it cannot be gleaned. This is why it’s critical to your business’ success to pay attention to your maximum output and be familiar with how to manipulate it.
Overview: What is capacity management?
Capacity management (CM) is the process of ensuring that an organization has the resources in place to meet its current and future obligations. This output can be measured in terms of people, machines, money, or any other resource that is necessary to deliver a product or service. CM is essential for businesses that want to maintain a high level of efficiency and optimize their resources.
In Lean Six Sigma (LSS), CM is considered an important part of the overall DMAIC (define, measure, analyze, improve, control) process. The goal of CM is to ensure that the correct amount of resources are allocated to each step of the process in order to achieve maximum efficiency. This involves analyzing current output levels and predicting future needs based on projected changes in demand.
Ultimately, production capabilities and output are what will set you apart from competitors and take your business to the next level. But the process doesn’t happen on its own. CM is the concept in action that manages those capabilities into achieving company goals.
4 significant benefits of capacity management
CM done correctly results in a multitude of benefits that touch every aspect of the business. In fact, the methodology is sought because it so consistently results in the following positive outcomes.
1. Increased profits
When businesses can accurately predict and accommodate for future demand, they are able to produce and sell more products and services, resulting in increased profits.
2. Improved customer service
Bottlenecks and constraints can lead to missed deadlines and delivery delays, which can frustrate customers and hurt business reputation. CM helps organizations avoid these issues by ensuring they have the output to meet customer demand.
3. Enhanced competitiveness
In order to stay competitive, businesses need to be able to quickly adapt to changes in the marketplace. This means being able to adapt output capabilities as well, and CM helps businesses meet this need for flexibility.
4. Reduced business risk
Business risk can be high when output is constrained due to lack of planning or wasteful over-provisioning. CM helps organizations avoid risks by focusing on carefully planned output that aligns with their overall operations strategy and business goals.
Why is capacity management important to understand?
CM is important to understand because it affects all aspects of a business, including production, profits, and customer service. CM planning helps ensure that an organization has the ability to meet customer demand, which is essential for maintaining a competitive edge and achieving business success. In addition, output constraints can lead to costly delays and disruptions, so it’s important for businesses to understand this and have plans in place to avoid these issues.
CM is also important from a risk-management standpoint – by having a careful plan in place businesses can reduce the risk of experiencing negative consequences due to limitations.
An industry example of capacity management
One effective way to increase output is through business partnerships. In 2019, Amazon placed an order with Rivian, a start-up electric vehicle manufacturer, for 100,000 electric vans, turning unknown and unfunded Rivian into a household name virtually overnight. The partnership was an immediate win for Rivian and the amount of exposure they have received since the announcement will be directly responsible for a significant ramping-up of their entire operations, if they can successfully pull it off.
It is critical that Rivian has CM methodologies in place to ensure their resources are used efficiently and effectively.
Mere months into assembly, Rivian’s production output has maxed out at their one and only plant, and they are already behind schedule after dealing with supply chain bottlenecks. They’re not yet hitting the delivery date goals established with Amazon, and still as a company have $0 in revenue. In light of Amazon’s majority shareholder status (20%), the partnership is admittedly atypical. But that doesn’t mean Amazon won’t look to Rivian to have contingencies in place, and act on them quickly when inefficiencies occur.
To Rivian’s credit, they are attempting to do just that. Not to be deterred by maxing out production resources at their existing plant, they’ve dedicated $5 billion to a new facility in Georgia. They are also relying heavily on some of Amazon’s technology to correct malfunctions with the vehicles, effectively turning what could be 4-6 month shutdowns into three week hiccups.
Regardless of how production continues to go and if future delivery dates are met, both companies have realized huge upsides from the partnership. From that standpoint, the collaboration is already a successful one.
7 best practices for capacity management
When CM is done well, organizations can improve their ability to produce quality products and services while maximizing the use of their resources. CM can be applied in any process or area of an organization where output needs to be managed and improved.
The following are some key practices to keep in mind when implementing a CM program:
- Planning is essential to ensuring that your business has the resources it needs to meet demand. This includes forecasting future production needs and ensuring that you have the necessary infrastructure in place.
- Utilize LSS methodology to optimize resource utilization. This can help you identify and eliminate waste, making the most of your resources.
- Establish service level agreements (SLAs) with your customers and partners to ensure that everyone is clear on what is expected of them.
- Use CURVES to visualize and track utilization over time. This can help you identify trends and make adjustments as needed
- Regularly review your plans and adjust as necessary to reflect business changes.
- Stay up-to-date on CM best practices and emerging trends.
- Implement additional output within your data center before resources are exhausted, even if it may take time for demand to grow to the point where utilization exceeds 80%. It is better to be proactive than reactive in CM.
Frequently Asked Questions (FAQ) about capacity management
Q. What is CM?
A. CM is the process of ensuring that an organization has the ability to meet its current and future business needs. This includes forecasting future production needs, planning for and acquiring the necessary resources, and managing those resources to ensure that they are used effectively.
Q. What is the goal of CM?
A. CM seeks to align output with business needs, ensuring that the output exists to meet the strategic objectives of an organization.
Q. What are some examples of CM planning tools and methods?
A. There is a wide range of planning tools and methods available that can be used by any manager or team, including CM requirements planning (CRP), business CM planning (BRP), and demand management.
Q. Is CM an important process?
A. CM is the only way to ensure that an organization has the ability to meet its current and future business needs, which is why it’s so important. Many companies have suffered from shortages in the past, which has had a negative impact on their business. CM is essential to preventing this from happening.
Can capacity management make your business more capable?
CM is an excellent LSS methodology to increase capability and productivity. CM provides a visual map of usage and distribution, allowing for proper management and control across all departments and business functions. By increasing output through planning and proper management, you can help ensure your company’s success as it grows with the ever-increasing demands on its capabilities.« Back to Dictionary Index