Capacity Planning
Definition
Capacity planning is the process of determining the production, storage, and labor resources needed to meet expected demand, and deciding how to close gaps between required and available capacity.
In Practice
Capacity planning happens at three horizons. Long term, it covers plants, lines, and major equipment, decisions that take years and large capital. Medium term, within S&OP, it covers shifts, hiring, subcontracting, and pre-building inventory ahead of peaks. Short term, it becomes finite scheduling: sequencing this week's orders through actual machines and crews.
The recurring dilemma is chase versus level. A chase strategy flexes capacity up and down with demand, minimizing inventory but incurring overtime, hiring, and layoff costs. A level strategy runs steady output and buffers seasonality with inventory, smoothing operations but tying up cash and risking obsolescence. Most companies blend the two.
A sunscreen manufacturer illustrates the choice: demand peaks fourfold in summer, but doubling filling lines for three months is uneconomic, so it levels production from January and builds stock, accepting months of carrying cost to protect peak-season service without capital investment.
Related Calculators
Related Terms
Sales and Operations Planning (S&OP) is a monthly cross-functional process that aligns demand, supply, inventory, and financial plans into one company-wide plan. It gives leadership a single set of numbers to run the business on over a 3-to-24-month horizon.
Master Production Schedule (MPS)The Master Production Schedule (MPS) is the anticipated build plan for finished products or key end items, stating what will be produced, in what quantity, and in which time period. It is the primary input that drives MRP.
BottleneckA bottleneck is the resource or process step with the least capacity in a system, which limits the output of the whole chain. Total throughput can never exceed the bottleneck's rate.
ThroughputThroughput is the rate at which a system produces sellable output, such as units per hour or orders shipped per day. In theory-of-constraints usage, it means the rate at which the business generates money through sales.