At this moment, an organization somewhere in the world is struggling to support its customer’s demand requirements. The result from failing to meet customer demand requirements can lead to disruption in product supply, decline in sales, and harm to the company’s reputation. Customer demand misalignment takes place because the organization has allowed a bottleneck to develop somewhere in its supply chain, preventing them from producing the amount of goods required to satisfy their customer demand. At a high level, the root cause of the problem is simple; the quantity of demand in units exceeds the supply capacity in units. This scenario can take place due to a variety of reasons and it is in the company’s best interest to develop a plan that solves this problem using a structured process for identifying and breaking constraints in the supply chain process.
Capacity planning is the management of limits and workloads on the company’s resources that contribute to the overall supply capacity. There should always be a strong focus on managing capacity constraints in the supply chain, especially in the manufacturing environment where there are many complex factors contributing to the overall supply capacity. Whether you manufacture your product in house or leverage a contract manufacturer you should have a detailed understanding of the supply capacity constraints for your product. There are numerous processes in this space that generate a capacity risk including unreliable production equipment, fluctuating accessible labor, inventory flow, and many others. Manufacturing output must first be viewed as a holistic process because if one particular piece of equipment has exceeded 100% of its capacity utilization, a bottleneck constraint has been born, and the entire manufacturing process cannot support the demand requirement. Capacity planning is particularly challenging for high growth technology companies due to the lack of historic sales data, rapid expantion of sales, and ramp up time associated with production. Thus, high growth technology companies must conduct detailed upfront calculations to determine capacity at ramp up, at launch, and the required time frame to add additional capacity.
It is very common to see manufacturing organizations managing capacity constraints in a reactionary manner. For example, if you focus in on one particular piece of equipment on a production floor, demand levels can be extremely unstable, so it is essential to understand the maximum capacity limits, not only on each value stream, but each piece of equipment on your manufacturing floor because it only takes one of them to create a bottleneck in the collective manufacturing process. This can be done using various methods including the following calculation, which is a simple formula that can be used to calculate the total capacity in units for any individual process at the manufacturing level.
Capacity Utilization = Daily Demand in Units / (Seconds per shift / Cycle time in seconds x Pieces per cycle x Quantity of shared processes x First Pass Yield x Shifts per day)
Below is a description of each variable in the formula and why it is important to consider when determining capacity utilization on a specific manufacturing process.
Daily Demand in Units
– The quantity of units that the process must support
Seconds per shift
– The number of seconds per shift that the process is running
Cycle time in seconds
– Total time from beginning to end of your process
Pieces per cycle
– The quantity of units that are produced in one cycle
Quantity of shared processes
– This will normally be one process, but can potentially be more if there are multiple processes producing identical products at the same rate
First Pass Yield
– The number of quality units coming out of a process / the number of units going into that process over a period of time
Shifts per day
– The amount of shifts that the process is operating per day
When the Daily Max Capacity in Units for a specific process has been determined, it can then be compared to the daily demand in units. If capacity exceeds demand, i.e. the Capacity Utilization % is greater than 100%, you simply have a supply constraint in your overall manufacturing process that needs to be addressed. It is very important to have a detailed process for measuring capacity utilization that enables clear visibility in your manufacturing operations. When you’ve succeeded in establishing this metric to raise a red flag when detecting potential future supply constraints, you will have the ability to be proactive in planning and implementing a sustainable solution ahead of time. Capacity planning will allow your company to avoid potential bottlenecks and minimize overall supply chain risk as your company scales. Companies that proactively establish a capacity planning process better satisfy their customer’s demand and position themselves for long-term success.