Measuring Capacity in Manufacturing for Supply Chain Management

Manager and worker talking about supply chain capacity at recycle plant
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Capacity is often defined as the capability of an object, whether it is a machine, work center, or operator, to produce output for a specific time period, which can be an hour, a day, etc.

Some companies—especially those that don't have supply chain optimization as a core business strategy—ignore the measurement of capacity, assuming that their facilities have enough capacity. But, oftentimes, they don't.

Measuring Capacity

Companies measure capacity in different ways using either:

  • the input,
  • the output, or
  • the combination of the two.

For example, a recycling company calculates its capacity based on the amount of material they clear from the inbound trailers at the plant, i.e. the input; whereas a textile company calculates capacity based on the amount of yarn produced, i.e. the output.

Companies use two measures of capacity—theoretical and rated. The theoretical capacity is defined as the maximum output capacity that does not allow for any downtime, whereas the rated capacity is the output capacity that can be used for calculation purposes, as it is based on a long-term analysis of the actual capacity.

Capacity Strategies

Within supply chain optimization and manufacturing and production management, there are three basic capacity strategies used by different organizations when they consider increased demand:

  1. The lead capacity strategy
  2. The lag capacity strategy
  3. The match capacity strategy

Lead Capacity Strategy

As the name suggests, the lead capacity strategy adds capacity before the demand actually occurs. Companies often use this capacity strategy, as it allows a company to ramp up production at a time when the demands on the manufacturing plant are not so great.

If any issues occur during the ramp-up process, these can be dealt with so that when the demand occurs, the manufacturing plant will be ready.

Companies like this approach as it minimizes risk. As customer satisfaction becomes increasingly important, businesses do not want to fail to meet delivery dates due to the lack of capacity.

Another advantage of the lead capacity strategy is that it gives companies a competitive advantage. For example, if a toy manufacturer believes a certain item will be a popular seller for the Christmas period, it will increase capacity prior to the anticipated demand so that it has the product in stock while other manufacturers would be playing “catch up.”

However, the lead capacity strategy does carry some risks. If the demand does not materialize, the company could quickly find itself with unwanted inventory as well as the expenditure of ramping up capacity unnecessarily.

Lag Capacity Strategy

This is the opposite of the lead capacity strategy. With the lag capacity strategy, the company will ramp up capacity only after the demand has occurred.

Although many companies follow this strategy, success is not always guaranteed. However, there are some advantages to this method.

Initially, it reduces a company’s risks. By not investing at a time of lesser demand and delaying any significant capital expenditure, the company will enjoy a more stable relationship with its bank and investors.

Secondly, the company will continue to be more profitable than companies who have made the investment in increased capacity.

Of course, the downside is that the company would have a period where the product is unavailable until the capacity is finally increased.

Match Capacity Strategy

The match capacity strategy is one in which a company tries to increase capacity in smaller increments to coincide with the increases in volume.

Although this method tries to minimize the overcapacity and under-capacity of the other two methods, companies also get the worst of the two, as they can find themselves over capacity and under capacity at different periods.

To optimize your supply chain, you need to be able to supply your customers with what they want, when they want it—and accomplish that by spending as little money as possible. By understanding and taking advantage of your facility's actual manufacturing and production capacity, you can accomplish this all-important supply chain optimization goal.

Software to Manage Capacity

Increasingly, software programs like enterprise resource planning (ERP) and warehouse management systems (WMS) calculate throughput using formulas that are dependent on capacity.

Updated by Gary Marion, Logistics and Supply Chain Expert.