# Capacity Planning

Capacity planning is the discipline of matching what you're able to produce with what the business needs you to produce. In IBP, it's the reality check — the place where ambitious growth plans meet finite equipment, labor, and time. ⚙️

Capacity planning:
The process of determining the production capacity needed to meet changing demand, and developing plans to provide that capacity at acceptable cost and risk.

# Capacity Types

Before you can plan capacity, you need to agree on how to measure it. These three definitions come up constantly — and conflating them is a reliable source of confusion.

Capacity Type	Definition	Example
Design capacity	Maximum theoretical output under ideal conditions (24/7, zero downtime, zero changeovers)	A filling line rated at 600 units/hour = 14,400/day design capacity
Effective capacity	Maximum realistic output accounting for planned downtime, changeovers, maintenance, and breaks	Same line at 18 hours of productive time = 10,800/day
Demonstrated capacity	Actual observed output over a recent period — what the resource has actually produced	Historical average of 9,200/day (accounts for unplanned downtime, quality losses, etc.)

Most planning should use demonstrated capacity as the baseline, with effective capacity as the upper bound for improvement initiatives. Using design capacity in your plan is a recipe for chronic shortfall.

# The Capacity Planning Hierarchy

Like supply planning, capacity planning operates at multiple levels of granularity and time horizon.

Level	Horizon	Granularity	Typical Decisions
Resource planning	1-5 years	Plant / site / major asset	New facility investment, major equipment, strategic outsourcing
Rough-cut capacity planning (RCCP)	3-18 months	Key resources / bottleneck work centers	Shift patterns, workforce levels, overtime budgets
Capacity requirements planning (CRP)	1-12 weeks	Individual work centers / machines	Detailed scheduling, short-term labor allocation, expediting

Resource planning feeds the strategic and financial planning horizons of IBP. If you need a new production line, that's a capital decision with a 12-24 month lead time — it must surface in the annual operating plan.

RCCP is the tactical workhorse. It tests the master production schedule against critical resources and flags overloads before they become shop-floor crises. See supply planning for how RCCP fits into the planning cascade.

CRP is operational — it translates the plan into detailed work center loads. This is typically managed outside the IBP cycle, in the execution layer (MES/ERP scheduling).

# Capacity Strategies

When you anticipate demand growth (or decline), how do you time your capacity investment? There are three classical strategies, each with distinct trade-offs.

Strategy	Description	Pros	Cons
Lead	Add capacity before demand materializes	Ready to capture growth; better service levels	Capital at risk if demand doesn't materialize; potential underutilization
Lag	Add capacity only after demand exceeds current supply	Lower capital risk; high utilization	Lost sales during ramp-up; poor service during transition
Match	Add capacity in increments that track demand closely	Balanced risk; moderate utilization	Requires accurate forecasting; frequent smaller investments

Most businesses use a blend. You might lead on warehouse space (lower capital intensity, longer lead time to build) while lagging on specialized production equipment (high capital, shorter install). The IBP process is where these strategic choices get pressure-tested against the demand and financial plans.

# Bottlenecks and Constraint Management

Every production system has at least one constraint — the resource that limits total throughput. Theory of Constraints (TOC) offers a useful mental model:

Identify the constraint (the resource with the highest utilization or longest queue)
Exploit it — ensure the bottleneck never starves for work or sits idle for avoidable reasons
Subordinate everything else to the constraint — non-bottleneck resources should feed the bottleneck, not optimize locally
Elevate the constraint — invest to increase its capacity only after you've fully exploited it
Repeat — once you relieve one constraint, another emerges

In IBP terms, the bottleneck resource should be the first thing tested in RCCP. If the bottleneck can handle the plan, everything else likely can too.

# Capacity Levers

When the plan exceeds available capacity, planners have several levers to close the gap — each with different cost, speed, and risk profiles.

Lever	Speed to Deploy	Typical Cost	Best When
Overtime	Immediate	1.25-2x labor rate	Short-term spike, known duration
Shift additions	2-8 weeks	Hiring + training costs	Sustained demand increase, 3+ months
Outsourcing / co-packing	4-12 weeks	Variable; often higher unit cost	Overflow capacity, non-core products
Capital investment	6-24 months	High; fixed asset addition	Structural demand growth, long-term bet

The IBP process should explicitly model these levers as scenarios. The supply review presents them with cost and risk implications; the integrated reconciliation step decides which to approve. 📊

# Feedback into Demand and Finance

Capacity planning isn't a one-way street. Constraints discovered in the supply review must feed back into the other IBP steps:

Demand planning — If capacity can't support the unconstrained demand plan, the demand team needs to know so they can prioritize products, customers, or channels. Allocation decisions should be deliberate, not accidental.
Financial planning — Capacity investments (overtime, shifts, capital) change the cost structure. The financial plan must reflect these decisions, and the P&L impact of capacity-constrained revenue should be transparent.

This closed-loop feedback is what separates IBP from siloed planning. Without it, finance plans to a number that operations can't deliver, and everyone finds out too late.

Supply Planning — the planning cascade that capacity planning supports
Financial Planning — where capacity investment decisions hit the P&L and balance sheet