Capacity Planning in Operations Management and Manufacturing

The pandemic   highlighted the importance of capacity planning:

Many companies faced steep drops in customer demand, leaving them with underutilized buildings, equipment, and workforces.

Yet other manufacturers faced unprecedented customer demand — from swimming pools to household cleansers — that left them scrambling to optimize performance among existing assets to satisfy old and new customers. 

Strategic capacity planning could have mitigated both issues for many firms.

How to Use Capacity Planning in Operations Management to Maximize Profit

How? By establishing a company-specific blueprint that matches short-, mid-, and long-term forecasts of demand vs. corporate capabilities, limitations, and constraints. This blueprint then informs strategic choices about when, where, and how to: 

• Introduce new products/services — or refresh sales, marketing, and channel tactics
• Hire new employees — or retrain current associates 
• Buy new equipment — or refurbish legacy machinery 
• Build new plants — or reconfigures existing facilities

Performance Solutions by Milliken helps companies accurately align resource capacity with demand, enabling them to optimize revenue from assets while improving profit margins (by minimizing wasted resources). 

Forecast Demand to Estimate Capacity Requirements

Predictive business analytics help companies to estimate future demand to make better decisions regarding their capacity — supply goods, production capacity, workforce levels, logistics requirements. By assessing historical market data, market predictions, and economic trends, our practitioners help clients to create data-driven models for what to anticipate from markets. 

These models identify demand patterns (e.g., seasonality) and estimate both adoption rates for new products and cannibalization rates for legacy products. Performance Solutions uses these models to evaluate client product portfolios and plan product lifecycles to meet customer demand.

This quantitative analysis must be supplemented with qualitative research: conversations with customers and analysts can reveal emerging trends not yet represented in market data. All this demand planning — quantitative and qualitative — should be gathered on a regular cadence and incorporated into a company’s sales and operations planning (S&OP) process, with demand horizons typically ranging from three months to two years out (i.e., the time necessary to find/build new facilities).

Assess Resource Capacity Requirements

Once demand is estimated, manufacturers must assess their production resources — facilities, machinery, labor, supplies — to ascertain if the company is capable of delivering on that demand at a profit. 

This is much harder than it looks; in early 2021, during the pandemic, production volume (as a percentage of designed capacity) at manufacturing facilities averaged just 60 percent. Yet roughly one in 10 plants had production volumes of 90 percent or higher.¹

It’s important to note that high production volume doesn’t necessarily equate with success. For example, a facility operating at 95 percent capacity may be straining machines (i.e., avoiding routine maintenance) and labor (overworked frontline associates), leading to inefficient product output (i.e., poor quality and low yields). The true objective is to remain efficient and increase capacity. That’s why manufacturers need capacity models and capacity planning tools that allow them to productively flex capacity up or down. These models should assess a range of factors:

• Ability to procure the required volume of materials/components at reasonable prices 
• Facilities available to produce required goods (internal or outsourced) 
• Labor requirements, from frontline to management and executives, as well as support services (information technology, sales, etc.)
• Logistics requirements

This resource planning uncovers bottlenecks that can prevent a company from meeting demand. For example, we’ve recently seen our clients struggling to find managers and improvement specialists. Performance Solutions by Milliken has responded by offering Rapid Improvement Approach engagements. Rather than asking our practitioners to coach and train client employees over a long period, the practitioners work alongside frontline associates and managers, filling previously vacant roles and helping clients to meet unexpected demand.

How the Capacity Planning Process is Continuously Improved

The capacity planning process has myriad opportunities for improvements. Just as forecasts are continuously updated, the forecasting process itself requires regular review — by examining the accuracy of past forecasts and the data upon which they’re based, and then revising appropriately. To do this, many organizations use the mean absolute percent error (MAPE) method to determine a forecast’s accuracy. MAPE calculates the absolute difference between the forecast and actual demand for a SKU for a defined period, then divides that figure by actual demand. MAPE goals should be 10 percent or less.²   For example, if forecasted demand for a period was 80,000 units and actual demand was 65,000 units, MAPE would be 19 percent. Regularly assessing MAPE helps to identify flaws in previous estimates and improves future forecasts.

Methods of Capacity Planning in Operations Management

Yet even with accurate forecasts, choosing the wrong approach to define capacity requirements can lead to lost revenues or profits:

Lag method

Estimates minimum resources and lowest costs to satisfy customer demand, but could result in a delivery lag if demand rises more than anticipated, or if deliveries are missed.

Lead method

Estimates sufficient resources to address optimal demand projections, but could lead to unused capacity and staffing if demand doesn’t materialize.

Match method

This ideal method uses business analytics and ongoing monitoring of capacity conditions to closely match capacity to demand 

Remember, too, that capacity planning can also result in lost revenue and profits if requirements are based on wasteful operations practices. Unfortunately, most manufacturers have a long way to go in reducing waste. In 2021, for example:

• First-pass quality yield was 79 percent (average)
• Machine uptime as a percentage of scheduled uptime was 73 percent (average). 

These two performances — combined with production volumes as a percentage of design capacity — delivered an overall equipment effectiveness (OEE) of just 42 percent (average). Compared to the full potential of their operations, manufacturers on average were getting less than half of what was possible in 2021.³

That’s why Performance Solutions by Milliken helps companies pursue and achieve operational excellence that minimizes or eliminates operations wastes. The benefits of an engagement establishes a performance system that delivers improvements not only to capital utilization but also production quality, safety management, and cost of goods sold, including:

• Average ROI of 8:1
• Capacity increases between 25 percent to 40 percent
• Reduction in safety incidents of up to 80 percent
• Defects decreased 40 percent to 60 percent
• Productivity increases up to 50 percent 

When it comes to capacity planning, these improvements can mean the difference between investing in new production space — or leveraging existing assets to their fullest.

Partner with an Ally in Operations Management Capacity Planning

Performance Solutions by Milliken assists organizations with capacity planning, from high-level strategies to operational management. We’ve helped companies define capacity requirements — and free up capacity — in industries such as consumer goods, pharmaceuticals, food and beverage, plastics and rubber. 

If your company has trouble managing and efficiently leveraging its capacity, Performance Solutions by Milliken offers onsite training for managers.

We come to your facilities and coach on concepts including:

• Assessing and understanding current culture and financial performance
• Conducting audits of current operations and processes
• Teaching clients about zero-loss thinking and calculating losses

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[1] MPI Manufacturing Study, The MPI Group, 2021.

[2] “Developing More Robust Demand Forecasting,” Milliken.

[3] MPI Manufacturing Study, The MPI Group, 2021.