Capacity Planning in Digital Age: A Process to Prepare to Meet the Volatile Demand

Capacity Planning in Digital Age: A Process to Prepare to Meet the Volatile Demand

Amit Gupta (KPMG LLP, USA)
DOI: 10.4018/978-1-5225-7700-3.ch011

Abstract

This chapter answers the following questions: 1) What is the capacity planning process? 2) Why do companies need to perform capacity planning? 3) What are current challenges in the capacity planning process? 4) What are different levels in the capacity planning? 5) What are planning zones? 6) How does capacity planning implementation journey look like? In the chapter, the author touches some of the basics of the capacity planning and then goes into advance level in the capacity planning. The chapter expects readers to have a basic knowledge of the capacity planning.
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Literature Review

Capacity planning has been around for a very long time; earlier businesses used to plan factory throughput or the number of customers they can serve to buy equipment or hire labor. Initially, capacity planning span was a factory to a workstation. When supply chains began to move out of organizations’ four walls, a need for holistic capacity planning manifested, with several challenges. The long lead time associated with outsourcing introduced limited flexibility and higher inventory, for both safety stock and cycle stock. Global footprints led to inconsistent factory utilization, which highlighted the need for global planning and visibility; however, with limited software sophistication, the focus remained on optimizing a factory and pressure feeding-plants and suppliers to support the plan. With today’s digital capabilities, an organization can not only link its strategic plan to a detailed execution-level capacity plan, but also gain visibility outside its four walls to ensure the complete network can support its strategic plan.

To link the strategic plan to the operational plan and support specific decision needs, the capacity planning process has broken into multiple levels. Each level has different granularity and frequency and has a distinct purpose. While APICS divides end-to-end capacity planning into four levels (resources requirement planning, rough-cut capacity planning, capacity requirement planning, and input/output control), this chapter divides end-to-end capacity planning into five levels with strategic capacity planning as an additional level to align corporate objectives with the execution plan. The variations in the number of levels have existed; for example, Bram Desmet of Solventure and Adrian Bentley of McBride divided the capacity planning process into five levels in a webinar1.The picture below shows the proposed five levels of capacity planning.

Figure 1.

Capacity planning levels

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Five levels in the capacity planning provide a holistic, top-down view of the capacity—validating and verifying the process’s end goal at each stage and disseminating the information to the next level to make execution-level decisions. For example, leadership defined a long-term goal in strategic capacity planning that is disaggregated into a yearly plan considering market conditions in the annual budget planning process. Following the budget, rough-cut capacity planning and capacity requirement planning generate and track a tactical plan to achieve the annual plan. Finally, detailed production planning adds execution-level detail for day-to-day execution. The level of sophistication and need of supporting technology increase as the process moves from level 1 to level 5.

A subsequent section provides background information, and after the background, the chapter expands five levels of capacity planning process and provides a maturity model for organizations to assess their capabilities.

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Background

Capacity Definition

Capacity is the output of a resource for a period. A resource can be a manufacturing plant, an assembly line, warehouse space, a truck, or any equipment that assists in producing a product or delivering a service. Resources can exist within an organization’s four walls or at companies supplying components, raw materials, or supporting select operations. For example, Samsung© builds components for its Galaxy© product line at its facilities in South Korea while it also uses Foxconn© for assembly operations in China; therefore, Samsung has internal capacities in South Korea and external capacities at Foxconn in China.

The following diagram shows a simple linear supply chain with five nodes—supplier, manufacturing, transportation, warehouse, and store. Each node in this supply chain has one or more capacities. For example, the raw material supplier, a mining company, has capacity in the form of labor and heavy machinery to extract ore, such as an earthmover that can move 1,000-tons of dirt per hour. The transportation company has trucking capacities to support the movement of the goods, such as a truck that has a total of 1,000 cubic feet of space or can move a 25-ton weight.

Figure 2.

Different types of capacities in the supply chain

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