Capacity planning is the process of determining the production capacity needed by an

organization to meet changing demands for its products.[1] In the context of capacity
planning, "capacity" is the maximum amount of work that an organization is capable of
completing in a given period of time. The phrase is also used in business computing as a
synonym for Capacity Management

A discrepancy between the capacity of an organization and the demands of its customers
results in inefficiency, either in under-utilized resources or unfulfilled customers. The
goal of capacity planning is to minimize this discrepancy. Demand for an organization's
capacity varies based on changes in production output, such as increasing or decreasing
the production quantity of an existing product, or producing new products. Better
utilization of existing capacity can be accomplished through improvements in overall
equipment effectiveness (OEE). Capacity can be increased through introducing new
techniques, equipment and materials, increasing the number of workers or machines,
increasing the number of shifts, or acquiring additional production facilities.

Capacity is calculated: (number of machines or workers) × (number of shifts) ×

(utilization) × (efficiency).

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.

• Lead strategy is adding capacity in anticipation of an increase in demand. Lead

strategy is an aggressive strategy with the goal of luring customers away from the
company's competitors. The possible disadvantage to this strategy is that it often
results in excess inventory, which is costly and often wasteful.
• Lag strategy refers to adding capacity only after the organization is running at
full capacity or beyond due to increase in demand (North Carolina State
University, 2006). This is a more conservative strategy. It decreases the risk of
waste, but it may result in the loss of possible customers.
• Match strategy is adding capacity in small amounts in response to changing
demand in the market. This is a more moderate strategy.

In the context of systems engineering, capacity planning[2] is used during system design
and system performance monitoring.

Capacity planning is long-term decision that establishes a firms' overall level of

resources. It extends over time horizon long enough to obtain resources. Capacity
decisions affect the production lead time, customer responsiveness, operating cost and
company ability to compete. Inadequate capacity planning can lead to the loss of the
customer and business. Excess capacity can drain the company's resources and prevent
investments into more lucrative ventures. The question of when capacity should be
increased and by how much are the critical decisions.

Capacity – Available or Required?

From a scheduling perspective it is very easy to determine how much capacity (or time)
will be required to manufacture a quantity of parts. Simply multiply the Standard Cycle
Time by the Number of Parts and divide by the part or process OEE %.

If production is scheduled to produce 500 pieces of product A on a machine having a

cycle time of 30 seconds and the OEE for the process is 85%, then the time to produce
the parts would be calculated as follows:

(500 Parts X 30 Seconds) / 85% = 17647.1 seconds The OEE index makes it easy to
determine whether we have ample capacity to run the required production. In this
example 4.2 hours at standard versus 4.9 hours based on the OEE index.

Repeating this process for all the parts that run through a given machine, it is possible to
determine the total capacity required to run production.

Capacity Available

If you are considering new work for a piece of equipment or machinery, knowing how
much capacity is available to run the work will eventually become part of the overall
process. Typically, an annual forecast is used to determine how many hours per year are
required. It is also possible that seasonal influences exist within your machine
requirements, so perhaps a quarterly or even monthly capacity report is required.

To calculate the total capacity available, we can use the formula from our earlier example
and simply adjust or change the volume accordingly based on the period being
considered. The available capacity is difference between the required capacity and
planned operating capacity