What is capacity? Is this important? Why would we care in our business?

Capacity – the ability to meet demand, receive guests, produce products; expressed as an amount per time period. A hotel has a certain capacity of guests they can serve each night. A manufacturing has the capacity to make a certain number of products per week.

Is this important? Yes. We need to have a good idea of our capacity for planning purposes. But – what is capacity? How easy is it to measure? If we have a small restaurant, with four tables each able to seat four individuals – will we always have 16 people sitting and buying food? No – sometimes we’ll have a couple at a table or a group of three, and we are not making full use of our capacity. If we run a production facility and a machine breaks down, capacity is ‘lost’ and unavailable.

How much capacity do we plan for? In manufacturing the question is addressed strategically, then through sales and operations planning (S&OP), then balanced in the short-term through adding staff or running extra shifts.

Service firms have a slightly more difficult job. Demand can vary significantly. How much capacity should we plan for?

Capacity costs MONEY. Is it going to be sensible for a service firm to plan capacity to meet the maximum demand? Probably not. Many service firms use some form of ‘demand management’ to influence demand patterns and ‘shift’ demand from a busy period to a quieter period (promotions, special discounts). If we planned for peak demand much of the time we have paid for capacity that will never be used. However, some service organisations may still plan to meet peak demand where there is a crucial reason to do so. Hospitals are an example; they need to be able to serve large numbers of sick or injured people during epidemics or disasters.

Excess capacity consumes resources that could be better used elsewhere in the business. Fixing suitable levels of capacity can be tricky but can provide a firm with a long-term advantage (suggesting, of course, that examination of competitor actions may also be crucial).