What Is Capacity Planning? How to Improve It in 2024

Capacity planning, also known as demand forecasting, is a way of balancing the relationship between available and required resources for a project. Accurate capacity planning is important, as it can reduce roadblocks and slowdowns due to a shortage of staff or time.

This article will review what capacity planning is, how it works, and how to navigate potential issues you may run into during the planning process.

Table of contents: Capacity planning

• What is capacity planning?
• Types of capacity planning
• Capacity planning vs resource planning
• Benefits of capacity planning for your team
• How to start capacity planning
• Best practices for capacity planning
• 4 Capacity planning strategies to try
• Capacity planning strategies at a glance
• Examples of capacity planning in action

What is capacity planning?

In simple terms, capacity planning is the process of determining if there are enough people, with enough available hours, to complete a project. Sometimes, the term “capacity planning” also refers to determining production capacity in manufacturing facilities.

Regardless of the use, the core principles of capacity planning for manufacturing and knowledge work are the same: you have a need, and must make sure you have the available people, components, and time to make it happen on deadline.

Types of capacity planning

There are three main types of capacity planning: product, tool, and workforce. Here’s how they differ.

Product

Product capacity planning, or resource capacity planning, involves making sure you have the right amount of physical materials to execute a project successfully. When conducting product capacity planning, you’ll want to keep external factors—such as supply chain delays—in mind, as these can impact your long-term capacity.

Your product capacity planning efforts may involve taking a look at

• Raw materials
• Components and parts sourced from vendors
• Drop-shipped product inventory
• Warehoused product inventory
• Resource utilization levels

Tool

Tool capacity planning focuses on the hardware and equipment you need to get a project done. This might include taking a look at:

• Machines and supplies
• Specialized software
• Operational costs
• Production line maintenance

Depending on your project and industry, you may need to plan capacity for one of the above areas, or all three.

Workforce

Workforce capacity planning is the process of calculating the time your team members have available to complete a project. This can include both looking at your total number of team members as well as their individual workloads.

If your team doesn’t have enough time, collectively, to execute project deliverables, you may need to look at restructuring a project or hiring independent talent to help.

Capacity planning vs resource planning

Capacity planning is sometimes confused with resource planning. While the two are complementary forms of strategic planning, they aren’t the same thing.

When you work on capacity planning, you’re making sure that you have enough people, time, or physical resources to complete a project. When you do resource planning, you allocate which people and tools will be assigned to different stages of the project. You may make these assignments based on experience, skill sets, intended use, or other criteria.

In short, capacity planning helps you make sure that you can get the work done, while resource planning helps you figure out how to maximize the use of your team and supplies.

Benefits of capacity planning for your team

Capacity planning can help identify problems before they happen, and win more work from satisfied and impressed clients. This happens as a result of a few different benefits.

Increased efficiency

When your capacity is completely overloaded, efficiency will drop—no matter how many productivity apps you use. By making capacity planning a priority, you can make the necessary changes in your business in order to keep efficiency at its peak and boost profitability, without overloading your existing resources.

Fewer bottlenecks

Capacity planning exercises are useful even if you feel everything is moving smoothly. The different capacity planning strategies discussed in this guide can help you identify the potential for future bottlenecks based on demand, trends, and historical data. By planning for likely bottlenecks, you can mitigate their impact and keep projects moving forward.

Improved long term project management and processes

Certain types of capacity planning strategies require taking a broad look at historical trends and projected demand. This can help you better prepare for potential capacity needs over a long-term period, and improve overall efficiency.

You may find that capacity planning exercises help you discover new suppliers, rethink existing processes, and explore new ways of work (like hiring independent professionals to help you expand capacity during periods of peak demand).

Boosted visibility, transparency, and accountability

Because capacity planning requires you to take a close, honest look at performance, it can have the added benefit of improving transparency and accountability. You'll need to stay in regular communication with your team, take responsibility for changes in production timelines, build a road map for success, and be open about changing staffing needs. This might feel uncomfortable to address at first—but in the long run, it can help you be a more profitable business owner.

Added clarity for hiring decisions

Workforce capacity planning helps you clearly see where you may not have enough team members available to meet demand. With this data, you can make confident hiring decisions and look for specific skill sets and availability that will help your team reach its capacity goals. You may find that you need to:

• Add more members to your team on a full-time basis
• Bring in talented independent professionals who can support key projects
• Hire seasonal workers

How to start capacity planning

Ideally, you’ll want to tackle the process of capacity planning before you start a new project. However, if you’re already in the middle of something and are finding that you’re not able to keep up with demand, it may be beneficial to take a step back and do some capacity planning now. Here's how it works:

1. Determine maximum capacity
2. Conduct a demand test
3. Measure the capacity gap
4. Align future or current capacity with demand

By following these four steps, you can get a better handle on your team’s actual capacity and make sure that you have the necessary resources to deliver great work.

1. Determine maximum capacity

The first step in capacity planning is to figure out your maximum capacity. Given your current resources, tools, and workforce, how many projects or deliverables can you take on? What are the projected delivery dates?

If your company produces tangible goods, you should consider the maximum output of each production operator and tool. Then consider your team’s available time.

If your projects are primarily based around knowledge work, consider how much time each person on your team can reasonably contribute to a project without overwork.

If your work has specific resource requirements, consider any potential impacts on the supply chain when figuring out the future demand you may experience. Will you have available resources to produce enough products to keep up with demand?

2. Conduct a demand test

The next step is to figure out your maximum and available team capacity. You may already be under high demand and realizing that you can’t keep up—in that case, you’ve essentially already met the criteria for the demand test and you can begin closing your capacity gap.

If you are still able to keep pace with demand, then it’s a great time to evaluate both previous trends and test future predictions based on industry and company data. If you can meet demand right now, but industry trends show predicted spikes in interest, you’ll need to think about ways to potentially increase your capacity.

3. Measure the capacity gap

After estimating your capacity levels and capacity requirements, it’s time to balance the two against each other and look for any gaps.

Let’s say you run a small e-commerce business and know that, for each 100 items you sell, you need:

• Five remote team members to support customer service and marketing
• 100 shipping boxes and associated packing materials
• 100 individual items from third-party manufacturers

While conducting capacity planning exercises, you realize that demand for your goods is likely to double over the next few months. This means you’ll need:

• 10 remote team members to support customer service and marketing
• 200 shipping boxes and associated packing materials
• 200 individual items from third-party manufacturers

4. Align future or current capacity with demand

Keeping with that scenario, you’d need to do the following in order to close your capacity gap:

• Bring on five more team members to support increased operations
• Source twice as many shipping materials
• Make sure that your existing vendors can provide 200 items, or source additional suppliers to meet demand

There are a few ways you can do this, though. Depending on the capacity planning strategy you use, you may increase capacity in all areas at once or gradually increase capacity as demand grows.

Capacity planning isn't always about increasing capacity, either. If you find you have excess capacity for a given period, you can opt to lower your capacity to match demand and reduce inefficiencies.

Best practices for capacity planning

In order to make your first capacity planning experience successful, you’ll want to follow these four best practices:

1. Communicate
2. Adjust resources
3. Modify strategy
4. Scale with software

1. Communicate

Maintain regular, transparent communication with your team during the capacity planning process. Let them know that they can be honest when assessing their personal workload and capacity for more work moving forward.

This is doubly important when your team is fully or partially remote and may be operating on different schedules. Consider using dedicated Slack or Microsoft Teams channels to keep lines of communication open with remote and in-person team members, no matter where they are located.

2. Adjust resources

The goal of capacity planning isn’t to squeeze as much work as you possibly can from your existing resources. Instead, it’s all about recognizing where you may have a shortage or surplus of resources and making the necessary adjustments. By remaining open to adjusting your resources throughout the year, you can enjoy the many benefits of capacity planning.

3. Modify strategy

Flexibility is key when it comes to effective capacity planning. No matter how carefully you plan, there’s always the chance that demand will spike or there will be an unexpected supply chain delay that slows down your ability to produce. Keeping a close eye on supply, demand, capacity, and resources will allow you to be resilient and flexible, making changes as needed.

4. Scale with software

Software can help you with the capacity planning process in a few different ways:

• Predictive data analytics tools can help you forecast changes in demand and capacity over time
• Shared capacity planning tools and enterprise resource planning (ERP) systems can help plan for capacity changes and keep everyone aligned on those changes
• Automation software can handle repetitive tasks and reduce your team members’ workloads, freeing them up to focus on critical business operations

4 Capacity planning strategies to try

There are a variety of capacity planning strategies you can try, too. Each strategy has its pros and cons—you might need to try more than one to figure out which works best for your company.

1. Lead strategy
2. Lag strategy
3. Match strategy
4. Dynamic strategy

You may also find that you rely on different strategies with different teams or projects. There’s no right or wrong way to go about it—stick with whatever works best for you.

Lead strategy

Lead capacity planning is a proactive strategy. It involves making decisions based on future projections. If you know your business experiences a lot of sales every year around a certain time, you could use the lead time to increase your capacity in advance.

There’s always a risk that your predictions won’t become reality and you’ll be left with excess resources or inventory. Lead capacity planning is best in situations where you can reference data to be very confident about projected increases.

For example, tax preparers in the U.S. can be fairly confident that they’ll need more capacity in the first quarter of every year, since U.S. income taxes are due mid-April.

Lag strategy

Lag capacity planning is a reactive strategy. Rather than increasing capacity in expectation of higher demand, you wait until the increase has actually happened and you can no longer keep up.

The lag capacity planning strategy can be an essential tactic for companies that experience an unexpected demand on their products or services due to changing trends.

Unfortunately, this type of capacity planning can lead to delays in getting finished products to customers. This is due to the fact that you’re waiting to increase capacity until after the demand has occurred.

Match strategy

When using the match capacity planning strategy, you’ll keep an eye on market trends and actual sales.

Once the real-time demand for your product is on par with your current capacity, you will make small increases. When capacity and demand level out again, you’ll stop increasing—and when demand drops, you can reduce your capacity.

For many businesses, match capacity planning is a safe bet—but you’ll need to keep a very close eye on actual demand and industry data.

Dynamic strategy

The dynamic, or adjustment, capacity planning strategy is similar to the match strategy in that it involves making smaller, controlled adjustments. However, instead of waiting for your capacity to hit its max, you’ll look at past trends in order to make smaller-scale predictions over a period of time.

If you see that you max out your capacity every May, then you may use the dynamic model to begin making small increases in available capacity before May and keep an eye on how it matches actual demand.

Capacity planning strategies at a glance

‍

Examples of capacity planning in action

Let’s say that you run a Canadian company that makes swimming pool supplies. You primarily sell to consumers located in North America, and you know that your biggest sales season will be May through September every year. Sounds predictable, right?

Using a lead capacity planning model, you might increase material and workforce capacity during February, March, and April, producing extra inventory to meet the coming demand. Because you’re planning in advance, you’re confident that you’ll meet demand and sell your inventory by the end of the summer.

But what happens if, in July, customer demand suddenly doubles thanks to a viral TikTok video featuring one of your products? Suddenly, your lead capacity planning still isn’t enough to keep up with this new demand. You may need to now implement a lag capacity planning strategy in order to meet this increased demand and backfill unexpected orders.

The spike might not be permanent, though—many viral trends come and go. Once you see sales dipping again, you may decide to implement a match strategy and make incremental adjustments to keep pace with actual demand through the rest of your peak season.

Start your capacity planning strategy

Upwork’s work marketplace is the place to go to hire independent professionals who can help you take control of your capacity planning and meet customer demand. Whether you’re looking for business planners to help you figure out a strategy, customer service representatives and virtual assistants to manage day-to-day increases in work, or other skilled professionals, you can find them on Upwork.

Start planning—and working—more strategically by posting a job on Upwork today.