Capacity Planning: A Tactical Decision with
business environment has never been more challenging than it is right now. The speed of change in the marketplace is
creating a stress on corporations to respond quickly and effectively. The foundation that is required to react to
dynamic changes in supply and demand is based on understanding your supply
chain’s capacities. Understanding and
then building the infrastructure that provides the needed flexibility and speed
requires an in-depth understanding of how capacity impacts your business.
impact of capacity management is felt throughout the organization, within every
element of the supply chain. Supplier
capacity can bring production to a standstill.
Production capacity is equally important; if the capacity is not great
enough to meet peak demand periods and inventory building is not properly
planned, customer demand will go unfilled.
Distribution capacity, both storage and throughput, ensures delivery of
the right product at the right time.
Transportation connects all elements of the supply chain; as such, its
capacity issues are key, influencing service levels
and on-time delivery performance.
has become the rule, not the exception.
The need for capacity management is measured not in years or quarters
but rather in weeks and months. Changes
can be brutally fast and without warning.
Industry over the past two years has been hit hard with a steep slowdown
of their business. Some were managing
their capacity to great detail during the late 90s, with state of the art
systems in place; however, these systems failed when business conditions began
impacting their extended supply chains, including contract manufacturers and
suppliers. With these current levels of
change, dynamic measurement and planning tools have become a necessity.
as well as internal dynamics create the need for constant monitoring and
adjustment of capacity levels and policies. Global economic conditions and competitors
cause external pressures that challenge current business practices. From price pressures to raw material
availability, organizations must be flexible enough to react quickly to these
changes. Internal dynamics can be
equally as disruptive. Acquisitions and
partnerships as well as moves into new markets create opportunities to leverage
current assets and spend capital wisely.
However, without proper planning, these opportunities can become large
challenges and liabilities if synergies are not exploited. No matter how well capacity planning is
conducted, these decisions must periodically be revisited to make sure they are
still aligned with the organization’s goals.
If so, they will provide the foundation to support new initiatives
including collaboration throughout the extended supply chain.
Reality: A subjective issue
every manager knows, capacity is a difficult concept to quantify. Whether it’s a workstation’s ability to
process jobs or a manufacturing plant’s capability for a year, the answer is
frequently “it depends.” Because of the
dynamic nature of capacity and the interrelationships among different supply
chain elements, capacity is forever changing.
Product-mix changes, process or equipment engineering improvements,
labor availability and new data management systems are only a few reasons
capacity can suddenly change. The most
available and, therefore, most popular measure of capacity is the past—but the
past is not necessarily a good indication of the future.
is an answer. Many tools have been
developed to address the dynamic nature of supply chains today. In an effort to empower managers, to allow
them to plan rather than react, planning tools evaluate a variety of variables and
are superior to “educated guessing” about where, how much and when capacity
should be modified. With a scope ranging
from a full view of the supply chain to a subset of the organization to a micro
“within the box” view of a facility, there is a tool to
meet any capacity management need. These
tools help quantify the differences among alternatives and lead to a greater
understanding of the interrelationships within a supply chain. From identifying bottlenecks, to backup
suppliers, to available alternate routings, to contingency planning, the true
cost and impact of decisions can be evaluated.
Because all elements of the system being studied can be represented at
once, sub-optimization can be avoided.
Alternatives can be objectively evaluated to determine their true impact
on a variety of performance measures, including throughput capacity, inventory
levels, and cycle times, before expensive and disruptive changes are made.
Advantage: Knowledge is Power
pervasive influence and the pace of change make the need for accurate knowledge
and flexibility a necessity. The ability
to quickly react, while making educated and informed decisions, will directly
impact the health and success of your organization. It will enable you to rise above your
competition, to compete based on your supply chain and the service and
flexibility you can provide.
segments of the beverage industry face extreme supply and demand seasonality—at
the same time. These changes can be so
dramatic that fulfilling all demand becomes an impossibility. Though this situation is not a desirable one,
the question then becomes “which demand is the most profitable?” With capacity management issues at the
suppliers, production facilities, and distribution locations, this problem
becomes a true strategic supply chain issue.
For one of the nation’s largest beverage
companies, demand in the spring water market is exploding. Spring water is a government-regulated
product with strict definitions of acceptable spring sources. Springs have a certain amount of water flow
that varies throughout the year. The
heaviest flow occurs in the winter and spring as snow melts, with the lightest during
summer and fall. Of course, demand for
spring water peaks in the hot summer months, with the least demand in
winter. Simply said, the raw material
availability is lowest when demand is highest.
Environmental factors can further exacerbate raw material availability,
conditions no one can accurately forecast or control. During drought years, water availability is
severely limited—but this is not known until just before the season
starts. As a further complication,
finding new spring sources is a difficult task, with political, environmental,
and regulatory issues creating a slow, multi-year process.
Tradeoffs must be made and alternatives must be
evaluated in businesses with such extreme seasonality. Options include pre-building inventory, in
house capacity, and outsourced capacity.
In-house capacity is reliable but expensive and difficult to
reduce. Building and storing inventory
allows production capacity to be reduced, decreasing capital assets; however,
inventory costs are incurred and additional storage space is potentially
needed. Outsourced capacity is more
flexible but has a higher cost per unit and may require some sort of
commitment. These costs must all be
simultaneously evaluated to determine the lowest cost solution for the current
business climate. The questions that
must be addressed include:
capacity should be on-hand?
should be outsourced to a 3rd party?
first two decisions, how much pre-building is necessary to meet demand?
that process have to begin?
storage space and distribution capacity is required to finally deliver that
product to customers?
These classic capacity management issues directly
impact how the organization operates and can change each year, depending on
product mix, demand levels, production efficiency, and distribution
capabilities. What begins as one simple
capacity issue grows into a detailed challenge that touches every segment of
the supply chain. Because of the co
dependencies and the number of variables, determining the optimal way to meet
demand while maximizing profits is nearly impossible without a planning tool.
In this case, weather had created a situation
where all demand would probably not be met due to lack of capacity throughout
the supply chain. The question became:
what demand should I drop to maximize profits, considering all relevant costs
and capacities in the supply chain?
Production line efficiency and capacity, the cost of new springs and
facilities, spring water availability, the cost of transporting water (very
heavy product to move), the cost of carrying inventory, and the cost of
distribution space all factored into the equation. A strategic network design tool was used to
conduct a comprehensive analysis. The
tool allowed all costs, capacities, and service constraints to be evaluated at
once, eliminating the possibility of sub-optimization, remedying one problem
but making another worse. What resulted
from the study was the most profitable way of meeting customer orders and
managing all the interrelated capacities within the business, while honoring
all business policies and constraints.
Computer manufacturers are constantly facing
sudden increases and decreases in demand.
The economy has a direct impact on this industry, and new products are
constantly being introduced. These
realities place strains on infrastructure and existing capacity. With short ramp ups in demand and tight
service requirements, the decision of where to produce products has a strategic
impact. Short product life cycles result
in severe ramp downs as well, requiring flawless planning, not just at the
product introduction but also as the product life cycle wanes. If demand is not closely monitored and the
resulting capacity needs adjusted, demand will go unfilled or inventory will accumulate. Without warning, these organizations must be
able to react swiftly to make capacity management adjustments.
Because of the deep bill-of-material of a computer,
decisions must be made regarding where and how to produce assemblies. Because assembly is labor-intensive, seeking
the lowest cost labor intuitively makes sense.
However, in evaluating this decision, labor cost must be evaluated along
with increased international trade and transportation costs as well as raw
material/assembly availability. As this
decision is magnified by all potential locations and subassemblies, the problem
grows into a complicated issue with many possible alternatives. Vertical integration decisions must also be
made: should the assembly be produced in-house or purchased from a 3rd
party? This may not be a choice solely
based on cost; reliable product availability, quality and product marketing
plans may impact the decision. Various
combinations may also be available, including using 3rd parties but
also using internal sources for overflow, for backup, or only for certain
facilities. The decisions and options
are endless—analytical tools help evaluate and quantify these decisions.
In this case, vertical integration and high
international trade costs such as duties had resulted in many locations
throughout the world. A strategic network
design tool was used in the analysis. The
tool evaluated which locations were appropriate, which suppliers should be
used, which operations should be kept in house and which outsourced, where
international facilities made sense to minimize international trade costs, what
modes could be leveraged to ensure service but minimize inventory costs, and
how distribution operations should be designed (DC and customer sourcing from ports,
plant direct shipment, etc.). In
addition, the tool was used to evaluate the impact of time and capacity on the
supply chain during peak demand periods, especially relevant during new product
launches. Finally, business policies
were evaluated including postponement strategies to enable product
customization closer to the customer.
What resulted from the study was the least cost method of sourcing,
assembling, and distributing product to meet customer demand with the fewest
assets, taking into account all available outsourcing options, business
policies and constraints.
In today’s dynamic business environment, speed and
flexibility are a necessity. From being
able to quickly respond to business conditions to reacting to dramatic changes in
customer demand, an imbalance of capacity can have devastating results. Too much capacity can result in low return on
assets, morale damaging layoffs and expensive facility closures while too
little can result in lost sales and eroding customer loyalty. Utilizing a strategic network design tool allows
an organization to objectively evaluate its extended supply chain and
simultaneously consider all costs and business policies. This understanding can then drive an
organization’s capital expenditures and strategies as they build a world-class
supply chain, built to compete against any organization in the world.
Manager, Business Solutions