Capacity management is a set of planning actions used to ensure that any business infrastructure has adequate resources to maximize its potential activities and production output under any conditions. When discussing resources, it’s important to acknowledge that there are two types of resources, human and infrastructural, as there is a difference between their capacity attributes which affects the planning methodology. An airline for example, needs capacity in terms of different aircraft types, depending on the range and number of passengers, available cargo space etc. These are infrastructural resources. However, an airline also needs air and ground crew to operate the infrastructure which falls under category of human resources. But why is capacity management so important for building and operating a sustainable business model and what is the connection between infrastructural and human resources? Let’s take an example from our favorite social place, namely a restaurant on a Saturday night. You enter a fully booked restaurant, find your table, and spend the entire evening waiting for drinks and food due to lack of human resources in the kitchen and the bar. Most of us will be unsatisfied with such service and therefore won’t visit the restaurant again. On the contrary if the restaurant operates with their maximum human resource capacity on a Wednesday evening, where there aren’t many reservations, it will also incur losses. So how should the restaurant manage their capacity in this example? The infrastructural resources are fixed in this example due to the size and design of the restaurant and it can be measured as the number of available seats. The restaurants utilization of the infrastructural resources can be measured as the number of occupied seats divided by the number of available seats as a percentage. If there are 46 guests in 100 seats restaurant, we can say that utilization is 46%. But what about planning and managing human resources? This is where the math gets complicated. We need to know either by experience or measurement how many guests one waiter can serve, and then calculate the process time from “enter” to “serve”, and only then can we determine the number of waiters we need. For the kitchen’s human resources, the planning is even more complex, as there is no clear and precise prediction of the customers’ menu preferences, so we’re forced to rely only on the number of reservations and historical data of orders from the menu. This example illustrates the importance and complexity of capacity management, while also taking into consideration the interplay between infrastructural and human resources. What isn’t mentioned, is that the crew in the restaurant also need some capabilities to cook and serve the meals, but that discussion is left for another time. Capacity management is a cyclic process constructed in four phases, and based on my experience I will try to explain each phase by using simple examples from real life. That said, in many instances capacity management can be very complex exercise multiple variables which requires a proper Capacity Management Information System. (CMIS). Let’s explore a restaurant’s capacity planning in a simplified simulation.
1. Analyzing the demand based on
business objectives.
This initial phase is
extremely critical as it determines your real demand, sets the basic forecast
models for planning of both infrastructural and human capacity. For the
restaurant business we need a clear forecast model of potential utilization on
each day of the week, a forecast of the popular dishes on the menu, and many
other aspects. In this phase it is recommended to develop a forecast plan or
model. A forecasting model will never be very accurate for a restaurant due to
the many varying factors as: time of the month, weather, season etc., but is
still recommended to have a basic model based on historical data and direct
reservations.
2. Evaluating
the current infrastructure.
In this phase the current
infrastructural capacity should be evaluated to assess potential extension or
additional changes. For the restaurant, the main question will be: ‘can we
extend the capacity in the current restaurant and by how many seats?’ Can we
re-use the current kitchen layout and infrastructure? What is the
current utilization distribution for a week, a monthly, and a year.
3. Implement
Capacity Planning
In this phase the real
business magic happens. Based on the analysis and evaluation done in the
previous phases we have to determine and establish a capacity planning
model. The capacity planning model should contain all basic
variables and metrics to enable dynamic planning operations from day to day.
Based on our forecast model for our famous restaurant we need to determine the
following variables:
• Supply
and utilization per employee.
If a waiter works a
6-hour shift, there is a high likelihood for them to take breaks totaling 45
minutes, so the actual time spent working will be 5 hours and 15 minutes.
Furthermore, in that time the waiter will also spend time prepping the tables
before the arrival of customers. If we assume that will total to an additional
45 minutes the actual “Value Adding Time” for serving customers will be 4 hours
and 30 min. So, the actual “Value Adding Activity” or “Revenue Generating
activity” is 75% and this variable shall be included in the planning. So, if the
total service staff consist of 10 waiters, each working 6-hour shifts the total
serving capacity will be 45 hours and not 60 hours. The same approach will be
applicable for the kitchen staff as well and it’s common to use 68 - 75%
utilization in capacity planning in many industries.
• Volume
in terms of customers per hour.
Why per hour? Normally
the guest spends around 2 hours in the restaurant, and it will give more
precise planning if the volume is hourly calculated. With these variables,
it is possible to calculate the required capacity. Let’s assume the restaurant
opens at 17.00 and there are 80 customers expected in the first hour. Let’s
also estimate the serving time per customer (Process Time) to be 5 minutes. The
entire demand will hence be 80 customers · 5 min equaling 400 minutes or
6.6 hours of required capacity in the first hour. The utilization was 75% so an
extra 25% (breaks and table preparation) needs to be added, which brings
the total to 8,3 hours capacity required for the first opening hour or 8,3 full
time waiters. From 18.00 to 19.00 the volume is 100 guests and the same
calculation as before can be repeated: 100 · 5 min = 500 minutes or 8,3
hours. If we apply 25% for lost utilization the required capacity will be 10,4
hours or 10,4 full time waiters. The approach for the kitchen will be the same,
just with more variables such as the customer’s order etc. This
capacity planning method is very precise, and can be written as: 𝑉𝑜𝑙𝑢𝑚𝑒 (V).
Process Time (PT) 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = 𝐷𝑒𝑚𝑎𝑛𝑑, and we
need to calculate required supply in terms of human resources taking into
consideration the true utilization which is between 68% - 75%. Now imagine
high volume operations like Anti Money Laundering in Financial Institutions. It
is common to process millions of customers per year and if the volume (V)
and process time (PT) are not precisely captured and calculated, there will be
a huge difference in the calculated capacity plan. If your PT changes by just 1
minute, suddenly the demand will change with 1 million minutes if the V =
1.000.000 operations. That difference is about 15 Full Time Employees (+/-). In
summary it is extremely important to properly forecast and monitor volumes and
manage the process time. In such high-volume industries, it is very
important to implement Capacity Management Monitoring, which brings us to
the next phase.
4. Monitor
Production Capacity
Once the forecasting plan
(managing demand) and our capacity plan (calculating supply demand) are finalized,
it will require a thorough process of monitoring the variables impacting the
capacity plan but also frequent revision of the entire capacity management. It
is common practice especially in high volume industries to recalculate capacity
in every instance when your process has changed which means your forecast and
volume therefore may have changed or your infrastructure has changed. Another
aspect is how to connect your capacity management process with your performance
management process. If today’s production according to performance management has
not been achieved, it must be investigated as it will impact your capacity
demand in the following days and some variables in the capacity model therefore
will require rework.
Summary of learnings:
• Capacity management is
an extremely important element of Operations Management and has direct impact
on business objectives as illustrated in this article. Not enough capacity will
create customer complaints, delays, backlogs and will in a worst-case scenario
have very negative impacts to the business. Too much capacity or overcapacity
will impact your financial performance in terms of P/L (Profit/ Loss).
• There are two types of
capacity, infrastructural which relates to the company’s assets and human
resources which refers to utilizing the assets to create customer value.
• Capacity
Management is a cyclic process of about 4 few phases and should as a minimum
contain: Demand Assessment (forecast Planning); Current Infrastructure
Assessment; Capacity Planning (calculating supply) and Monitoring Production Capacity.
