What Is Capacity Management? (Including Benefits and Tips)

By Indeed Editorial Team

Published May 26, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Adaptability to changing circumstances is a key component of successful businesses. Capacity management, also known as capacity planning, is the act of ensuring that a business can maximize its potential activities and output, regardless of the circumstances. If you're interested in maximizing the profitability of a business, you can benefit from understanding the various applications of managing capacity.

In this article, we explore what capacity management is, explain its uses, discuss its benefits, and provide tips for managing a company's capacity.

What is capacity management?

Capacity management refers to a method of comparing the production demands of a company with its resources to ensure it can continue to meet its changing demands. The management of organizational capacity is essential to ensuring that companies remain productive despite a variety of external factors.

Organizations study their maximum production capabilities to determine their capacity, then measure actual productivity to evaluate where they are underutilizing capacity or overburdening systems. Businesses can use their findings to implement changes that resolve any issues they've discovered.

Capacity planning helps organizations prepare for the future by testing and challenging the limits of their productivity. Managing capacity also involves determining the percentage of space that is in use over a specific period. The management of capacity may include the outsourcing of business functions, the purchase of additional equipment, and the leasing or selling of commercial property. Capacity planning also relates to critical project management techniques, including:

  • Handling resources

  • Using effective time management

  • Leading a team of employees

  • Overseeing the work process

Related: How to Build a Collaborative Team in an Organization

What is capacity planning used for?

The major benefits of capacity planning include the reduction of operational costs and improvements in speed and efficiency. By managing their capacity, businesses can maximize their ability to produce goods and services and use information technology (IT). Here are some examples of how an organization may manage their capacity:

Production capacity

Capacity planning enables businesses to investigate how effectively a company uses resources to produce goods. Resources can include owning or renting space, hiring staff, purchasing equipment and machinery, acquiring raw materials, or assembling and packaging products. The shortage of one or more categories of resources may prevent successful production or disrupt order fulfilment. Here are some examples of how companies may use capacity management:

  • Seasonal demand: It may be necessary for businesses to adjust production to follow general demand patterns throughout the year. For example, some companies have seasonal demands that require decreasing costs when product demand is low and increasing production when product demand is high.

  • Economic analysis: Long-term and short-term economic trends can provide companies with valuable insight into the short- and long-term demands for capacity. Having insights about the economy can also help companies plan for production flexibly to respond to changes in the market.

  • Industry trends: Companies can benefit from managing their capacity in the event of large industry trends that affect companies within a market. For example, the oil industry may experience changes in demand if electric cars become more popular.

IT capacity

Managing a business's capacity can also refer to the efficiency of an organization's computer networks to process data and handle network traffic. For example, a business may require intensive processing power to research new ideas, develop original products, or handle sizeable groups of users to prevent site crashes and malfunctions. The following are some examples of how managing a company's capacity can benefit its IT functions:

  • Assessing capabilities: IT resource management can determine the maximum processing power of an organization's computer systems and their ability to meet performance targets.

  • Measuring efficiency: Continuous monitoring of a company's computing system can give valuable insights into its usage time and speed.

  • Reducing costs: A business can enhance its computing performance without increasing costs by adjusting its IT capacity configuration.

  • Applying better practices: By adopting better practices, an organization can reduce the strain on its computing system. For example, an organization can use its capacity insights to reschedule maintenance tasks around times of high demand.

  • Forming plans: Managing IT capacity allows businesses to plan for their eventual computing requirements, such as by purchasing hardware or upgrading software.

Related: What Is Management? The Definition, Functions, and Levels

What are capacity planning strategies?

Companies and manufacturers devise capacity planning strategies to determine the resources necessary to meet their demands for their products and IT services. As a company's capacity increases, it can produce more goods and services to satisfy consumer demand. Lead, lag, and tracking are the three most common strategies for capacity planning. The following is a list of explanations for each of the three management strategies:

  • Lead strategy: The lead capacity strategy adds capacity to accommodate demand as it increases. Companies typically use the lead strategy to gain market share over their competitors.

  • Lag strategy: Lag capacity planning means adding capacity after a company is already operating at full capacity or beyond. By storing excess inventory with the lag strategy, businesses can avoid having excess inventory.

  • Tracking strategy: The tracking capacity strategy looks for ways to add capacity slowly in response to changing demands in the marketplace. While the method is complex, this is a safer strategy for most companies, because it's less risky than the other two capacity planning approaches.

Benefits of capacity planning

Here are a few of the ways capacity planning can benefit a company's production and IT processes:

Ensures productivity

Creating a single product typically involves a variety of logistics, production facilities, and distribution networks. In a complex production environment, reliance on insufficient or outdated information can cause complications. By managing capacity, businesses can identify whether their existing production methods are sufficient. Using IT capacity planning allows companies to track system performance, which is important to prevent them from overpaying for services they may not be receiving.

Assesses resources

By managing capacity, an organization can identify resources that are underutilized or overpriced. For example, it can help determine whether it's cost-effective to maintain a piece of older manufacturing equipment that requires constant maintenance. Investing in a new piece of equipment may enable a company to produce more units of a product while reducing repair costs and using the same amount of space.

Managing a company's capacity provides information on how to change a network's infrastructure to increase performance. Businesses may install less memory than necessary on their servers, resulting in slower performance.

Related: Top Product Management Skills

Locates systematic challenges

Businesses can determine where and why problems occur by managing their capacity. Findings can affect productivity and profitability. As an example, a company with similar production facilities may find that one facility produces more product per employee per hour. This means that the underperforming location may require better employee management.

The ability to troubleshoot IT problems is essential. IT capacity planning can identify problems with performance, such as network components that aren't functioning correctly. Using test scenarios, a company can locate any current or potential future system issues before they affect business operations.

Identifies skills

An essential part of capacity planning is the team's skills inventory. A skills inventory keeps track of individual employee skills and capabilities. When team members develop new skills, the business can update its skills inventory. For example, an IT team can list each member's expertise, such as web design, system testing, or IT architecture. An organization can use the inventory to determine whether the skills in the organization are appropriate for delivering its strategic initiatives.

Related: Why Project Management is Important (And Tips for Success)

Tips for managing capacity

Here are a variety of tips you may consider when implementing and using the capacity planning strategy:

  • Project future capacity to maximize billable utilization. Using your existing capacity to its fullest potential is important for creating an efficient and intelligent capacity planning strategy.

  • Create a process to support resource requisitions and allocations. In a capacity planning process, requisitions and allocations are critical. An organized workflow helps ensure companies order resources on schedule and document important information.

  • Study the company's past events, situations, and practices. By studying the company's past challenges, organizations can plan more effective business practices.

  • Consider testing different scenarios for productivity and processing. It's beneficial for companies to use capacity planning to examine all potential areas for improvement because of the complexity of production and IT systems.

  • Record and analyze available resources. When an organization has a complete understanding of its resources, it can effectively manage its capacity. A narrow focus can cause businesses to overlook some essential resources, such as experienced employees, market trends, and equipment capabilities.

  • Maintain open communication and collaboration. The interaction between executives, project management leaders, and stakeholders can speed up the development process and improve the quality of the project.

  • Perform a risk assessment. Companies can avoid unexpected project delays by monitoring risks, such as union strikes, inclement weather, and policies or regulations.

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