Analysis of Designed capacity
Capacity analysis is the process of determining the capacity of an operation. In this regard, “capacity” can have a number of meanings, and a truly comprehensive capacity analysis will evaluate the physical capacity of your infrastructure and facilities, your production capacity, and your mechanical capacity.
- Physical capacity of infrastructure and facilities: How much space is available for work processes and storage of inventory.
- Production capacity: The peak throughput of all of the systems in an operation. (I.e., how many orders can be processed/fulfilled compared to demand.)
- Mechanical capacity: The peak throughput of specific machines and technology, for example, sorters, conveyors, palletization equipment, etc.
Capacity Analysis in an Operation
- Physical Capacity
Physical capacity refers to how much physical space an operation has to house inventory, systems, and processes. It is often completed using modeling software, with the goal of identifying ways that space can be used more efficiently.
There are a number of ways that an operation can increase the physical capacity of their facilities, from reclaiming vertical space through the use of automated storage and retrieval systems (AS/RS) or goods-to-person technologies, to drop-shipping larger items to keep them out of inventory, to conducting an SKU analysis to prevent SKU proliferation and reduce inventory needs, and more.
- Production Capacity
Production capacity refers to the peak throughput of all of the processes in an operation. It takes into account important KPIs like total order cycle time, orders/lines picked per hour, order accuracy rates, and others.
Production capacity can be increased in myriad ways, from adding labor to replacing labor with automation to streamlining processes so that they are more efficient to make improvements to specific pieces of equipment (as we discuss below).
- Mechanical Capacity
Mechanical capacity refers to the capacity of a specific machine or piece of equipment within an operation. Peak rate is typically expressed as a number of items or orders that can be handled or processed over a given period of time (orders/hour or orders/day, for example).
Mechanical capacity can be increased by optimizing existing equipment with repairs or improvements, or by replacing aging equipment with more modern machinery that has greater efficiencies and throughput. As technology continues to improve to meet the demands of modern order fulfillment, everything from sorters to conveyors to packaging systems, palletization/depalletization equipment, and everything in between can all offer significant improvements in terms of capacity.
3 Strategies for Increasing the Capacity
When it comes to increasing the capacity of an operation, most businesses will pursue one of three common strategies: Lead Capacity, Lag Capacity, and Match Capacity. Each of these has their own unique advantages and disadvantages, and which one a specific operation decides to go with will depend on the specifics of their business.
- Lead Capacity
By following a Lead Capacity strategy, a facility would aim to add capacity before it experiences an increase in demand. By increasing capacity before the demand is present, this strategy allows an operation to immediately ramp up production when the demand materializes, preventing an inability to fulfill orders that could cause customers to turn to the competition.
This is commonly done leading up to a peak season, or when an operation expects an increase in demand due to prevailing business trends in order to improve their service level, reduce lead time, and reduce stockout costs. Of course, this carries with it the risk that those predictions will be wrong and that the capital investment will be a waste.
- Lag Capacity
On the other hand, an operation following a Lag Capacity strategy would wait until demand increases before increasing capacity. The main risk with following a Lead Capacity strategy is that an operation will make the wrong prediction and use the capital to increase capacity for a future demand that never materializes. Following a Lag Capacity strategy removes this risk, allowing an operation to only invest capital to increase capacity that it knows is necessary.
The downside to this is that an operation following a lag capacity strategy is likely to experience stockouts and lower service levels as it ramps up capacity to meet the new, increased demand. This can cause issues with business retention as customers turn to competitors to fulfill their needs.
- Match Capacity
With a Match Capacity strategy, an operation will aim to increase capacity as demand increases, in smaller increments. This is often done with the aim of reducing the risk of following an upfront lead capacity strategy while minimizing the business losses typically experienced with a lag capacity strategy. While this desire makes sense, in practice this modular expansion often amplifies inefficiencies and costs more over the long run to implement.