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Ensuring capacity matches demand

Fine-tune your capacity to make the most of sales opportunities and minimise waste. Learn how to absorb, chase, or manage demand.

Why is capacity important?

Getting your capacity right means meeting the needs of your customers without wasting resources. “Capacity” refers to the amount of business you can do over a set period of time. For example, the number of products you can make in a month, or the number of customers you can serve in an hour.

Capacity is not the same as capability. Capability means whether you can do something, whereas capacity is about how much of that thing you can do. For example, you might be capable of making the best coffee in town, but perhaps you need to increase your capacity so you can serve more of those coffees at peak times.

Ideally, you want to achieve optimum capacity (happy customers, minimal waste). You want to avoid constrained capacity (bottlenecks, lost sales opportunities) or excess capacity (wasting money and resources). Sometimes you may need to adjust your capacity to meet changing customer demand. And sometimes you may need flexible capacity when demand is unpredictable.

The right capacity helps many aspects of your business

Getting your capacity right can help you in several ways.

  • Sales — you’re ready for your customers whenever they’re ready to buy your products or services
  • Costs — you avoid spending money on resources you don’t need
  • Cash flow — you don’t tie up money in excess stock if you don’t need to
  • Quality — you can meet your customers’ needs without compromising on the things they find valuable
  • Speed of service — your customers don’t have to wait
  • Reliability — you don’t have to turn customers away or disappoint them
  • Flexibility — you’re ready to respond to sudden spikes in demand if necessary

Customer demand should drive your capacity

Ideally, your capacity should match customer demand most of the time. Of course, customer demand doesn’t stay constant. Depending on what type of business you run, demand can change by the hour, day, week, month, season, or year. For example, restaurants get busiest at mealtimes, bars get busiest on the weekends, accountancy firms get busiest at the end of the tax year, and toymakers get busiest at Christmas.

To optimise your capacity, you need to understand customer demand and predict when and why it might change. You can then plan your capacity over the long term, as well in the short term to deal with specific peaks or troughs. If customer demand is changing rapidly or is unpredictable, you may need to either chase demand or stay flexible.

Time spent measuring is time well spent.

Time spent measuring is time well spent.

The results will help your decision-making.

Measuring current demand

To plan your capacity, you first need to measure demand. You may already have a good feel for how much demand exists based on your busy and quiet times, but measuring more carefully will give you better insights.

Start by choosing an aspect of your business that indicates how much demand there is — for example, number of items you sell, number of customers you serve, or number of work requests you receive. Then choose the most logical period of time to measure — for example, a standard work week, the busiest period of each day, or your busiest season.

Next, match up these two things. For example:

  • number of items you sell each week
  • number of customers you serve between 8am and 10am each day
  • number of work requests you receive in June, July, and August.

Analyse your data — both big picture and detail

Now look at historical data such as sales figures or bank transactions. How much business are you doing in the time period you’re looking at? Can you spot any trends? For example, you might usually sell a certain number of items a week, but your sales figures show an increase in March and April that you hadn’t noticed before.

Looking across 12 months helps you spot longer-term trends, while looking at shorter time periods helps you see the detail of seasonal events, such as summer or Christmas.

Ask your customers and your suppliers

Gathering data and opinions from people involved with your business gives you great insights. Customers and suppliers can tell you all sorts of things you can’t see yourself or haven’t taken into account.

You can gather your customers’ opinions in a number of ways. You could set up an online survey, hold a focus group, or ask for feedback at your point of sale (eg, on an iPad or on paper). Ask customers what they like and what they don’t like, and what you could change to serve them better. Consider offering a small reward or a prize draw for taking part.

Ask your suppliers for their thoughts on what’s happening in your industry. Have they spotted any trends you should be aware of? Have they noticed anything that similar businesses are doing that you should also be doing?

Predicting future demand

Demand doesn’t always stay constant. As well as measuring current demand, you should consider possible increases or decreases in demand.

Ask yourself:

  • Is your business growing?
  • Is your customer base expanding?
  • Are new competitors entering the market?

Think about the wide range of factors that might affect demand in future.

  • Political factors — eg, a change of government might affect consumer confidence
  • Economic factors — eg, the changing price of ingredients might affect how much you can charge for your products
  • Social factors — eg, your core customers might be growing older and having children
  • Behavioural factors — eg, your customers might want more eco-friendly products or packaging
  • Environmental and climactic factors — eg, warmer or colder weather might affect what people will and won’t buy
  • Festival or cultural factors — eg, increasing interest in certain celebrations, such as Matariki, might open up new sales opportunities
  • Technological factors — eg, creating a new website, app, or social media channel might make your products or services easier to access
  • Legal factors — eg, new regulations might bring in certification for your product, meaning customers can easily see your superior quality

Think about your customers and competitors

Use the following tool to think about what’s important to your customers and how you match up to your competitors. Could you increase demand by focusing more on the things your customers value most? Should you expect a change in demand because of what your competitors are doing?

How you stand out in the marketplace

Measuring capacity

To measure capacity, you can focus on either inputs or outputs. Inputs are the resources you put into your business, such as staff hours and raw materials. Outputs are the products or services you provide to your customers.

If you just make a single, standard product, it’s relatively easy to measure your capacity for that output (eg, the maximum amount you can make each week). But the greater the range and variation of your outputs, the harder it becomes to measure capacity — then it might be better to focus on inputs (eg, the maximum number of hours your staff are available each week to make products or provide services).

For example, a plumbing company may find it hard to measure capacity by counting the number of jobs it can do each month (outputs), as each job is a different size. Some jobs take an hour whereas others take days or weeks. It’s much easier to measure capacity as inputs, such as the maximum hours available for plumbing each week.

Measure the inputs or outputs that make the most sense for your business

Input and output measures for different types of businesses
Type of businessInput measures of capacityOutput measures of capacity
Craft brewery Amount of ingredients
Volume of vats to brew beer
Length of time to brew a vat of beer
Bottles of beer produced each week
Plumbing business Number of hours any master plumbers can work each week
Number of hours any apprentice plumbers can work each week
Number of jobs that can happen at the same time
Billable hours each week
Amount of downtime each week (eg, rain days, travel time, holidays)
Café Number of seats
Number of wait staff
Number of meals the chef can prepare at once
How long seats are occupied for
Customers served each lunchtime
Meals served each day
Taxi company Number of cars
Number of drivers
Hours available to work each month
Total kilometres driven each month
Total rides made each month
Hours with passengers each month
Kilometres with passengers each month

Remember to factor in wastage

Measuring inputs or outputs, or both, gives you a good idea of your capacity — in theory. But remember that you probably won’t turn all inputs into outputs. There’s bound to be some wastage in time or materials, for example, spillage, breakages, imperfections in products, sick days, travel time, or unforeseen downtime.

It’s important to allow for a certain amount of wastage, but identifying excess waste will reveal opportunities for increasing capacity. Measure your theoretical capacity (if you could turn 100% of your inputs into outputs) against your actual capacity (how much of your inputs you actually turn into outputs). This will show you how efficient your business is. Process mapping can also help you identify inefficiencies.

Measure what you care about.

Measure what you care about.

You’re the best person to decide what to measure in your business to check whether capacity meets demand.

Case study

Measuring lunchtime at Aroha’s cafe

Aroha runs a small cafe that’s really busy at lunchtime but quietish at other times. She needs a way to deal with changing customer demand while keeping her costs down. She decides to ask a friend to sit behind the counter at lunchtime (12 to 2pm) and look at a range of input and outputmeasures of capacity.

The friend records:

  • number of seats in the café
  • time customers wait to order
  • time customers wait at their table for their meal to arrive
  • time customers take to eat their meals and leave
  • time to make each type of meal
  • total number of customers served between 12 and 2pm.

Aroha and her friend then analyse the results. They look at the big picture and the detail, and average times as well as peak times.

The results show that customers are waiting too long to order because only Aroha is behind the counter to serve. Aroha knew this already, but the rest of the results tell her things she hadn’t realised.

Customers are also waiting too long at their tables because some meals take a long time to prepare. This means that tables stay full for longer, meaning some potential customers go to the café next door instead.

The quickest meals to prepare are bagels. The ‘big brunch’ takes the longest to prepare.

Aroha figures she could sell more lunches between 12 and 2 if she had more staff, but also if meals took less time to prepare, or if more customers chose bagels over the big brunch.

Matching capacity to demand

Once you’ve measured demand and capacity, it’s time to make changes. Remember, you’re aiming for a balance between making the most of sales opportunities, keeping your customers happy, and keeping costs down. How are you doing so far? Are you always under pressure to serve your customers? Or could you easily do more business than you’re currently doing? What about if demand changes in future?

Three approaches to capacity are:

  • keeping capacity constant
  • changing capacity to fit demand
  • influencing demand to fit capacity.

Most businesses adopt a mixture of all three methods, but one method might work better for you than others.

Keeping capacity constant

If customer demand for your business is mostly constant, you may be able to keep capacity constant and absorb any slight increases in demand.

Graph showing fluctuating demand and constant capacityFor example, you might be happy letting people queue, or you might take pre-orders and let people know there’s a waiting time. Making customers wait isn’t always a bad thing — it may even show that your business is popular and worth waiting for. For example, a sushi shop that regularly has a queue outside at lunchtime could quickly get a reputation as the best sushi place in town.

Another way to keep capacity constant is to use quieter times to prepare for busier times, for example by stockpiling inventory. Of course, this only makes sense if you’re sure there’ll be the same demand later. For example, if you’re selling clothes, there’s no point stocking up on what’s selling well right now if customers will want a different fashion next month.

Spare capacity, when demand is low, can be used for other actives — for example, research and development.

Changing capacity to match demand

To match changing customer demand, you may need to increase or decrease capacity. For example, you could roster staff on for extra shifts when it’s busy or ask them to take their holidays when it’s quiet. You could hire more people in peak periods, or subcontract or outsource if necessary. You may also need to increase or decrease resources — such as hiring extra equipment in busy times.

Graph showing capacity changing to match demandTo make this method work for you, you need to regularly re-assess customer demand and make sure you’re responding to it accurately. Also, consider the potential downsides. For example, the cost of recruiting and training new staff if you only need them for short periods, and loss of control over quality if contracting or outsourcing.

Influencing demand to fit capacity

Influencing the behaviour or expectations of your customers can increase or decrease demand for what you’re selling. You can increase demand by cutting prices (eg, having a sale). And you can reduce demand by increasing prices at busy times (eg, peak fares or surge pricing). You can even shift demand from one thing to another by offering attractive alternatives. For example, if a restaurant reaches capacity for serving steak because of a backlog, wait staff can tell customers there’s a special on lasagne and risotto.

 

Graph showing capacity and demand at even levels

If you have a ‘while you wait’ service that’s getting too busy, you could change to standard drop-off and pick-up times. If you have distinct busy and quiet seasons, you could market the same thing in a different way to make off-season more attractive (eg, hotels offering off-peak holiday packages).

You might even consider developing new products or services to fill periods of low demand. For example, a food cart selling homemade ice cream and fruit juice in summer could start selling homemade soup and hot chocolate in winter.

You may need a mix of methods to make sure your capacity fits demand.

You may need a mix of methods to make sure your capacity fits demand.

Case study

Focusing on bagels

After measuring demand and capacity, Aroha figured she could sell more lunches between 12 and 2 if she had more staff, but also if meals took less time to prepare, or if more customers chose bagels over the big brunch. She now considers how to tweak capacity to better meet demand.

Keeping capacity constant — Aroha knows that keeping capacity constant isn’t really an option, as customer demand fluctuates a lot over the day. Making people wait a while at lunchtime is okay, but not for so long that they go somewhere else. Aroha can’t make all meals in the quiet times, as that affects quality and creates waste. She needs to be able to serve people more quickly when demand is high, but she can’t do it alone.

Changing capacity to fit demand — Aroha considers hiring another staff member. She’d love to offer a fulltime job to someone local, but for much of the day the extra person would have little to do. That’s too much capacity, meaning a wasted cost for Aroha. Maybe she could hire someone for two or three hours in the middle of the day? She knows a few students who might like the part-time work.

Influencing demand to fit capacity — Even with an extra part-time staff member, Aroha knows they’ll only just manage all the customers at lunch time. She wonders if she can influence her customers’ behaviour to help make the lunch rush easier.

Aroha’s bagels are the most popular things on the menu — in fact, they’ve become her speciality, and the thing that many people come to her cafe for. Bagels are also very quick to fill and serve, with no cooking or reheating required. And they’re easy to take away, so bagel customers don’t necessarily need a table. Selling more bagels will mean Aroha can serve more people more quickly.

Aroha decides to promote bagels over the big brunch by:

  • taking a few other things off the menu
  • offering some new luxury bagel fillings
  • offering bagel loyalty cards (11th one free)
  • doing a special on bagels from 2 to 4pm to encourage some customers to arrive outside of her busiest period.

By influencing customer demand, Aroha calculates that she can serve more people and make the most of sales opportunities. This will allow her to afford her part-time staff member.

Capacity problem solved: Aroha can keep her customers happy without wasting time, money, or food.

Quiz icon

Every business, product or service has a different production profile. Each differs in terms of:

  • volume (how much is produced)
  • variety (how many different things or variations of the same thing are produced)
  • variation (whether business is steady, or has peaks and troughs)
  • visibility (how much contact there is with customers).

Thinking about your production profile, and your competitors’, helps you understand where you have an advantage in the marketplace.

Use this tool to compare the production profile of a business, product or service against its competitors. You’ll reflect on volume, variety, variation, and visibility.

Based on your position, we’ll give you some tips on how to strengthen your point of difference — so you can compete better.

 

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Some businesses benefit from flexible capacity — the ability to quickly respond to changing or unpredictable demand. For example, you might need to quickly and easily:

  • change the volume of what you make or offer
  • change the range of things you make or offer
  • change from making or offering one thing to making or offering another.

It’s important to recognise that flexibility can be costly. Doing one thing and doing it well tends to cost less than trying to do a wider range of things or frequently changing what you do. Decide whether flexibility is really important for your business before investing in it.

Define the type of flexibility your business needs

Whether you need flexibility, and what type you might need, depends on what your customers want and what your competitors are doing. For example, you might need to respond to customer orders quickly, no matter when they come in. Or you might want to be able to quickly increase or vary what you’re doing, to create a point of difference in an ever-changing market.

Update measurements for your new processes

If you decide to become more flexible, you need to set benchmark measures before you change anything so you can measure any improvements. Flexibility can be costly and disruptive, so you want to make sure that you’re benefiting from any new processes.

Train your people

Your people are key to achieving flexible capacity. Whatever you need them to do to stay flexible will only happen if they’re on board and enthusiastic. It’s your job to train them and make sure they understand how important flexibility is to the success of the business. Your willingness to provide all the support they need builds the healthy culture necessary for making flexibility work.

Create incentives for your new processes

To make flexibility successful, consider offering your employees incentives. For example, a bonus each time they change from producing one thing to another in a set time. Or each time they produce more than a certain amount in one day. You could also encourage and reward staff for identifying ways to make processes more efficient.

Adapt your leadership style to suit the situation

How you lead your team may need to change depending on what you need them to do. At times you may need to set the pace and expect immediate results. At other times you may need to take a step back, listen, and debrief to make sure you understand any issues.

Getting your people on board is key to becoming     more flexible.

Getting your people on board is key to becoming more flexible.

Case study

Flexible production at Te’s Tees

Te and team run a small business printing a range of designs onto tee shirts and sweatshirts. They change their printing setup from one design to another whenever necessary to respond to orders. It takes a full day to do the changeover — in a busy month, they can lose a full week in changeover time. Te and team realise how inefficient this make-do approach is and decide to get more flexible.

First, they look at sales trends and customer insights to see when the demand for different designs changes. They realise there are two consistently popular designs all year round. They also notice that new designs become dominant only when advertised and the demand lasts for a month. They also see that sales volumes increase over Christmas.

They decide to have four production lines.

  • Line 1 — for the first of their popular designs
  • Line 2 — for the second of their popular designs
  • Line 3 — for whichever design they’re currently advertising
  • Line 4 — ready for an increase in demand over Christmas

The team changes Line 3 every month, with the goal of completing the changeover in 6 hours. This is down from a previously unpredictable amount, sometimes as high as 40 hours a month.

Line 4 isn’t running all the time, but they calculate it’s cheaper to have an unused production line year round than to store all the finished tee shirts until the Christmas rush. They only have to change this line over three times at most during the busy season — a maximum of 18 hours.

Over the busiest time, Te’s Tees hires some extra help. Employee induction is mostly focused on training for production line changeovers. The team draws some simple process maps and also films the changeover. They then show the maps and videos to the new employees and let them practice the changeover. Importantly, Te stresses just how crucial the changeover is to the success of the business and the new employees’ roles.

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