Capacity management in the supply chain

What is capacity management and why is it important?

Capacity Management refers to the actions of ensuring a business always maximises its potential activities and output. Importantly, under all conditions. With the aim to achieve maximum profit.

For example, in a hospital, capacity would be determined by the number of beds, the availability of medical staff, the hours during which operating theatres and diagnostic equipment (i.e., scanners) are in use. In a restaurant it could include the number of tables and chairs, the level of staffing and the opening times.

The challenge for capacity management is how to increase a production unit’s capacity to its full potential, without increasing the costs, to the point at which there is no overall financial benefit.

If every production line has a constraint (bottleneck) then focusing improvement effort on that constraint is the fastest and most effective path to increasing capacity and improved profitability.

What are the responsibilities of capacity management?

Capacity represents the available resources that can be changed to meet a certain level of demand. With that, comes a lot of responsibilities:

• Managing the capacity of a production unit to ensure you are achieving as close to the design capacity as possible i.e., the maximum output in ideal conditions.
• Making sure the production unit can meet demand from the customer.
• Demand is a complex function influenced by a wide range of variables such as weather, consumer buying power, economic conditions, promotions, competitor performance etc. These factors are constantly changing making the entire demand planning and consequently capacity management, a very challenging activity.
• Many internal factors such as machine downtime or staff sickness, or external factors such as a sudden upturn in demand from the marketplace or a change in the regulatory environment, can alter the balance between supply and demand and change the objective for capacity managers. If this situation carries on over the longer term and threatens the profitability of the unit then steps must be taken to improve capacity.

What are the three sub processes of capacity management?

There are three important sub processes within capacity management.

Actual output capacity:

The actual output on a given day I.e., 160 per day

Design capacity:

The maximum output that can be achieved under ideal conditions I.e., 200 per day

Effective capacity:

The expected capacity given the operating environment and constraints I.e., 180 per day

For high volume production line products, capacity will be expressed in terms of actual output capacity. This along with design capacity and effective capacity are the core measures of capacity in a production environment.

Design capacity is the theoretical capacity that the work centre is capable of processing, whereas the effective capacity is the actual capacity of the work centre after taking avoidable and unavoidable losses into consideration. The ratio between the two will provide the level of efficiency of operation.