What is Capacity Planning in Operations Management?

‘Capacity’ Definition in Operations / Supply Chain

The (output) capacity of an operation is the maximum amount of value-adding output (per time period) that can be sustained under normal operating conditions. Capacity can be measured in many different ways, across many different industries.

This is not the same as volumetric capacity nor the common expression of describing how many jobs are being worked on simultaneously.

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Examples of Capacity

Capacity is typically measured in units of output / unit of time. Capacity examples:

  • In an airport: ‘plane departures per hour’
  • In a restaurant: ‘meals served per day’
  • In a drinks factory:’ ‘bottles filled per minute’
  • In a hospital: ‘patients treated per hour’

What is Capacity Management?

Capacity management is an operations management activity that involves planning and coordinating productive resources (such as labor, materials, energy, machines and workspace) to fulfill the demand put on a business’ operations. It is inextricably linked to forecasting and demand management and is a key input to sales and operations planning (S&OP). 

Why is Capacity Planning Important?

Capacity planning is important because underestimating or overestimating capacity can have painful and expensive negative consequences. 

  • Underestimating capacity (or underestimating demand) could mean missed sales and / or long delays for customers
  • Overestimating capacity (or overestimating demand) exposes a business to high costs for unused capacity, for example idle people and machines

Capacity planning needs to happen over many different time frames, perhaps decades in the future, or just a few days in advance, depending on the circumstances.

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Want to learn more about demand and capacity management in operations and supply chain? Check out my course on Operations Management A-Z.

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