What is Capacity Planning and How to Do It?

Capacity Planning used in conjunction with an ERP system can improve the accuracy of planning and help control costs as well as plan for future expansion and growth.

Capacity Planning is the process of understanding and managing the capacity required to produce the throughput necessary to meet the requirements of production based on the company’s order position.

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Capacity Planning is the process of understanding and managing the capacity required to produce the throughput necessary to meet the requirements of production based on the company’s order position. It means that a company understands the production resources at its disposal to determine how many units can be produced at a given time.

Capacity planning is also a medium- or long-term tool used to determine what capacity is available when required.  Because it can be used to look further out into the future, it can help managers and other decision-makers determine when to add additional capacity through overtime, subcontracting, or additional equipment.

An ERP system can be a game-changing platform for a small to medium-sized manufacturing company.  It offers an opportunity for smaller manufacturers to utilize the same tools that larger competitors do and allow them access to the same automation and analytical tools that help level the playing field.  One key capability available in most ERP systems today is that of capacity planning.

Why is capacity planning important?

Capacity planning is the best manufacturing practice because it means that a company uses resources based on how many items can be expected to be made.  When done within an ERP platform, this gives a company several advantages such as:

  • With Capacity Planning, a company can more accurately manage throughput more efficiently over time and can consider seasonality and other surges and proactively address them within the organization as they occur.
  • Because data, routing, BOMs, and other components of the ERP system can be utilized, capacity planning has access to past data to help understand labor costs, inventory, and other costs associated with adding capacity if needed.
  • Because a company has medium to the long-term understanding of its capacity, it can plan increases to reduce lead times and allow for a balanced product mix.  This improves customer satisfaction and gives the company a competitive advantage.

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Things to consider when capacity planning within an ERP system

Capacity Planning used in conjunction with an ERP system can improve the accuracy of planning and help control costs as well as plan for future expansion and growth.  However, because each company is different, there are things to consider when using capacity planning in manufacturing.

  1. Data Accuracy – Any software platform is only as accurate as of the data that is input.  This is true of core components of an ERP such as routings, BOMs, inventory, and other data.  But capacity planning requires accurate data as well.  While run speeds, product mix, and even maintenance information can be added in some aspects of the ERP, changeover data and time studies to account for fatigue and expected disruptions must be measured on the production floor and outside of the ERP system for inclusion later. 
    • Example: If the changeover from Item A to Item B takes one hour but the changeover from Item A to Item C takes two hours, this information will need to be measured, understood, and added in some respect to the system.  If item B is a lesser ordered item compared to A and C, the accuracy of the capacity plan could skew over time.
  2. Nature of Operation – The nature of the business operation can impact the kind of decisions made for capacity. 
    • Example: If one manufacturing company runs two shifts on a five-day schedule while another runs a 24/7 continuous operation, the types of decisions made to plan for increases in capacity when needed will be different.  In the case of the five-day operation, capacity increases can be achieved simply by overtime or adding a shift.  While in the second case, of the 24/7 operation, the only way to increase capacity is through subcontracting or adding equipment.
  3. Capacity Planning is Not Scheduling – Capacity Planning should not be confused with production scheduling.  In production scheduling, the sequence of production orders and the optimization of those orders are planned to use several factors such as quoted lead times, on-hand inventory, order position, and others.  If that optimization is threatened by unexpected shifts in consumer tastes, seasonal disruptions or natural disasters, backlogs can occur.
    • Example: If capacity has shown availability for a relative average as determined by using ERP data over history, but seasonal orders or natural disasters pile on a backlog of orders for goods requiring longer changeovers, the capacity may not be wrong.  Instead, the issue must be mitigated with scheduling decisions to adjust.

Benefits of using ERP for capacity planning

Today’s ERP systems allow manufacturers to be more agile and flexible in their decision making.  They also allow them to operate with a level of accuracy, efficiency, and sophistication on par with larger companies.  And for those that chose to utilize capacity planning within their ERP system, there are many benefits to doing so.  The benefits include:

  • Automation – Automating production capacity within an ERP system reduces manual data errors.
  • Increased Capability – While manually calculating capacity is doable for a single machine or a few machines is possible,  it becomes more difficult and error-prone for calculating it manually for workgroups with many machines with different speeds, sizes, and ages.  Using an ERP system’s capacity planning capabilities exponentially increases the ability to manage large equipment workgroups and to calculate those group’s capacity automatically.
  • Monitor Costs – Because core data for purchased materials, labor, value-added processing, and other key factors are already in the ERP system upon implementation, capacity planning can allow a company to monitor costs during high growth or recession periods.  The projected capacity can also help companies set budgets for key areas such as personnel and inventory.
  • Production Cycles – Because the ERP system contains historical data that can be trended over time, companies can manage and plan capacity for seasonal events and other contingencies.  This predictive capability can identify when the heavy cycle starts, so the company can add labor and increase inventory buys.  It can also identify when the cycle will end so that labor and purchasing can be scaled back.
  • Growth – All manufacturing companies want to grow.  And again, by leveraging the historical growth overtime against capacity planning, year over year increases can help a company decide when to seek funding for capital equipment purchases and to trigger those purchases at just the right time to keep capacity growth on track.

ERP systems can offer cloud-based benefits such as flexibility, “pay-as-you-go”, modular experiences that can save money, improve operational efficiency, and help manage and grow a manufacturing company.  Utilizing capacity planning within an ERP system is a logical outgrowth as it takes advantage of automated, standardized data that is already optimized for use within the production environment.  This allows a manufacturer the ability to not only manage the day to day operations of the company with a state-of-the-art ERP.  It also allows them to use capacity planning in conjunction to plan for long term growth and control costs over time.

To help you better orient your business in the world of MRP/ERP systems, we have compiled a thorough list of the Top Six Manufacturing ERP Systems for Small Manufacturers that includes tips on how to choose the best software for your company.