Capacity Planning

Capacity Planning Strategies

Lead, lag or match? Capacity planning strategies are essential for maximizing efficiency and profitability in a small business. But if your capacity planning strategy isn't tailored to your company's business model, you could plan yourself right into a crisis.

Your company is experiencing a banner year.

Interest in your product has been steadily increasing and you have a feeling that you're about to experience a major spike in demand. Then suddenly it occurs to you: Does your operation have the capacity to meet a major increase in demand or are you about to leave a significant portion of your customer base high and dry?

The ability to accurately index production levels to customer demand (also called capacity planning) is a necessary skill in manufacturing. In fact, capacity planning can be a useful tool in any business that regularly deals with variations in demand. But regardless of the context, the goal of capacity planning is always to maintain enough production to meet customer orders without burying yourself under a mountain of unnecessary and expensive inventory.

There are three primary strategies companies use to perform capacity planning. Each comes with its own set of advantages and drawbacks, so you'll need to think carefully about which one is most appropriate for your company:

• Lead Strategy - The Lead Strategy is the most aggressive of the three approaches to capacity planning. Here, the company increases its production capacity in advance of anticipated increases in demand. Some companies use the Lead Strategy as a way to lure customers away from competitors, especially if a competitor is vulnerable to inventory shortages when demand skyrockets. The big risk with the Lead Strategy is that the anticipated increase in demand never materializes and you are stuck with excess inventory.
• Lag Strategy - The Lag Strategy is much more conservative than the Lead Strategy. Instead of increasing capacity in anticipation of suspected increases in demand, the Lag Strategy responds to actual increases in demand by boosting capacity after the operation is running at full steam. Although you won't accumulate excess inventory, the time it takes to ramp up production can result in the loss of customers to the competition.
• Match Strategy - The Match Strategy is the middle road between the Lead and Lag Strategies. Rather than substantially boosting capacity based on expected or actual increases in demand, the Match Strategy emphasizes small, incremental modifications to capacity based on changing conditions in the marketplace. Even though this strategy takes more effort and is harder to accomplish, it is much more risk-averse than other capacity planning options.

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