Ending the Confusion
Capacity is an often discussed and almost always misunderstood topic. Yet,
effectively managing capacity has a direct bearing on three issues of most
importance to an enterprise -- customer satisfaction, financial performance
and employee morale. While concepts such as Theory of Constraints and Lean
Manufacturing have made contributions to improving some enterprise performances,
they have made the capacity topic even more confusing -- unnecessarily.
Aunt Mollys Peppermint Candy
Aunt Molly made peppermint candy every Christmas for the family. Her homemade
recipe was so good that her relative's constant raving lead to her selling
it during the holidays to the bank, local motel and the Chevy dealer, bringing
in a little Christmas money for Aunt Molly. The word eventually spread
all over the county, then the state and eventually to WalMarts worldwide.
It is now Aunt Mollys, Inc. She hired a marketing director, who declared,
"We need a complete line of candy." In addition to peppermint,
Aunt Molly, Inc. now offers lemon drops, chocolate covered cherries, jelly
beans and, well -- you get the picture.
Effectively managing capacity has always been an issue. In the beginning
Aunt Molly solved the problem by keeping a few extra pots around and staying
up late to make all the candy needed to keep the relatives happy during
the holiday season. Now that Aunt Molly, Inc has three factories, two distribution
centers and hundreds of products, the capacity management problem is more
complex and cant be solved on the back of an envelope.
The Manufacturing Process
All products are made by purchased material flowing through resources,
eventually reaching a finished stage and then shipped to customers. Each
resource includes both equipment and people. The resource could be on the
factory floor, the engineering department, the software development group
or anywhere in a business. Aunt Mollys single kitchen resource was
fairly easy to manage, especially when she had only a single product.
The diagram below depicts a simple, sequential flow of material through
Sometimes these processes are independent and separated with piles of work-in-process
inventory (WIP). Other times they are are tightly linked, forming a work
cell or focus factory (or a kitchen!) and separated by small piles (ideally
zero) of buffer WIP. Many significant benefits result from linking resources,
creating cells and minimizing the buffer WIP. This is a major focus of
Lean or Flow Manufacturing initiatives.
As companies grow and offer more products, the number of resources required
increases -- so do the stakes when capacity is not effectively managed.
The flow can get convoluted to make the multiple products. Material now
flows from the first resource to three others loops back or sometimes follows
multiple paths before being completed.
Aunt Molly could determine how many pots and how many hours were needed
in the kitchen to make 22 batches of peppermint candy with her eyes closed.
Aunt Molly, Inc. became more difficult to manage when more products and
shared, multiple resources lead to the more complex material flow. In fact,
profit margins shrunk, inventory escalated and missed customer deliveries
Again, a major thrust of Lean or Flow Manufacturing efforts is to simplify
this flow by creating work cells to produce similar products, drive the
buffers down to zero and use kanban to pull products through the cell.
Theory of Constraints (TOC) efforts tend to recognize the demand variability,
justify the buffers to avoid disruption in the flow and thus "lost"
throughput and focus on overcoming the resource bottleneck. Lean or not,
TOC or not, capacity in the resources must be managed or there will be
a severe price to pay!
What Does Capacity Mean?
Capacity is a term that unfortunately does not have a universally-accepted
definition. This is why it is usually difficult to communicate on the subject.
Take this quick quiz:
The right definition of capacity is:
A. Hours worked in the resource?
B. Work done (or to be done) in the resource?
C. Output rating of the equipment (see the nameplate) in the resource?
The correct answer is B. Capacity is the work done (or to be done) over
a period of time. The unit of measure for "work" could be pounds
per hour, gallons per day, pieces per minute, standard hours per shift
or whatever. The process to manage capacity is simple in principle. The
hard part is getting "believable" numbers and then stepping up
to the ugly capacity problems and solving them.
Where to Start: Determine the Required Capacity
Go back to the simple process flow above. The first question we need to
answer is how much work do we need to get done in each resource, i.e. the
Required Capacity? The answer depends on which products and how many we
need to make -- and that depends mostly on the customers. Required Capacity,
regardless of whether we have the capability to make that much or not,
is derived from the master schedule which is mostly a function of product
Required capacity is almost always variable. At Aunt Mollys, it goes
up and down around Halloween and again in December. As product mix shifts,
the required capacity shifts in each resource. Sales promotions that succeed
(or fail) cause the required capacity to change. Short supply of key purchase
items changes the required capacity in all of the resources. The challenge
is to have the tools to quickly recalculate the changing required capacity
and communicate it to those who need to respond and adjust the resource
capability. Techniques such as Takt time, Capacity Requirements Planning
and Rough Cut Capacity Planning are helpful to frequently determine the
required capacity once the demand plans change.
Next question: How much is the resource capable of making?
The capability of the resource is the Demonstrated Capacity.
Demonstrated Capacity = Hours worked x effectiveness
of those hours
The historical Demonstrated Capacity is how much work the resource has
actually done, ie demonstrated. The future Demonstrated Capacity is how
much work we plan to get done in the future and it may be different than
the historical number. If the future Demonstrated Capacity is going to
be different than in the past, we need a clear plan of how it will be accomplished.
Wishing it were different wont do it. If we do nothing different
in the future, the future Demonstrated Capacity will be the same as the
historical Demonstrated Capacity, like it or not. Understanding Demonstrated
Capacity (see archives for an article on this topic) is critical and often
not considered when managing capacity.
Demonstrated Capacity is also variable. For example, as people get sick,
quit, advance up the learning curve or equipment wears out, the Demonstrated
Capacity changes in the resource. The future Demonstrated Capacity can
be greater than the historical Demonstrated Capacity by adding hours with
more people, working overtime or adding equipment. However, spending more
bucks or adding bodies is usually not the only solution. Effectiveness
can also be increased.
What happens during those hours that we scheduled people to work? We would
like to believe they are all busy making good product. In reality, we spend
those hours on a variety of activities. Here is just a partial list:
Reworking defective product
Replacing scrapped material
Setting up or changing over the equipment
Reporting labor transactions
Looking for material or tooling
Fixing broken equipment
Asking questions about unclear specs
Waiting for material
Talking to expediters
Notice most of these are not operator controlled. Most of them are due
to internal process issues. All of them add cost, not value. Many companies
attack and reduce them as part of the Lean Manufacturing effort. Others
credit the Total Quality program. Some companies put the effort under the
Theory of Constraints (TOC) umbrella. Others say it was ERP. Most companies
just do it as good business practice and dont waste time assigning
the credit. It is the reduction in these costly, resource-draining activities
that results in cost savings, not the Buzz Word of the Day.
How many different Demonstrated Capacities can a resource have? The answer
is infinite. Any change to the hours worked or effectiveness will cause
a different Demonstrated Capacity. This why the idea of finite capacity
is a myth. There is not a single "capacity" number. It can always
Non-Negotiable Principle for Capacity Management
Demonstrated Capacity must equal Required Capacity.
When the Demonstrated Capacity is less than the Required Capacity, this
is a constraint or bottleneck. Notice: the bottleneck or constraint is
always moving, not stationary since both Demonstrated and Required Capacity
are variable. You cant begin by scheduling to the bottleneck. You
have to locate the bottleneck first by determining both the Demonstrated
and Required Capacity. The "systems" role is to find the bottleneck.
Who you gonna call when you got bottlenecks? The bottleneck busters! In
this case, the Resource Managers. At the end of the day, effective capacity
management depends on people taking cost effective actions to make the
All capacity constraints can be overcome. It is only a matter of time and
money. The challenge is to see the imbalance coming and have enough time
to find cost effective solutions. This almost always means having visibility
farther into the future than customers place orders. This means an excellent
demand planning process is essential for effective capacity management.
TOC and to some degree Lean Manufacturing discussions tend to touch this
subject very lightly and almost always do not offer any tools to support
this critical, essential element. It is almost always swept under the rug!
When demonstrated is less than required capacity, work piles up, material
flow slows down and customer deliveries become late. When demonstrated
is greater than required capacity, the resource sits idle waiting for more
work or more likely people slow down, stretching the work out so as to
look busy. The result is costs go up.
Unfortunately, some companies have institutionalized performance measurements
that encourage, in fact reward, managers to do the wrong things when they
have excess capability. Utilization is a good example. The focus, even
the reward system, encourages maximizing utilization. As the resource makes
more, needed or not, to increase utilization, more overhead is absorbed
into inventory and creates the illusion of more profit. This flaw in the
accounting system logic can drive well meaning managers to make more work
to drive Demonstrated Capacity above the Required Capacity.
Throughput, as defined in Theory of Constraints, is maximized when all
resources are "balanced," i.e. the non-negotiable principle is
satisfied. The weak link in most companies is maintaining a valid demand
plan to use in determining the Required Capacity, i.e. knowing how much
we need to be making and maintaining credibility in the data. Once the
resource managers know how much to make (and believe it), they become very
resourceful in fixing the problem.
Where to Start: Five Universal Steps to Effectively Manage Capacity
The business was formed to deliver what customers want when they want it
and make a profit doing it. The five-step universal capacity management
process focuses on helping meet this goal. The five steps are:
Step 1: Determine the Required Capacity. This must be done far enough into
the future to respond cost effectively. The reality is customers don't
place orders with enough lead time to do this. A forecast is required.
Proven tools are available to translate product requirements into meaningful
Step 2: Measure the Demonstrated Capacity. This can easily be done by "recording"
how many (in capacity units of measure) are made each day or week. It may
be ugly, but it is true.
Step 3: Compare the Demonstrated and Required capacity. If they are equal,
great. If not, go to Step 4.
Step 4: Adjust the Demonstrated capacity. We have two capacity control
knobs to increase or decrease the demonstrated capacity -- hours scheduled
and effectiveness. Turn one or both until the demonstrated capacity matches
the required. If it will take too long or cost too much to make the adjustment,
go to Step 5.
Step 5: Adjust the Required Capacity. This means changing the plan to not
make as much as you can sell. Obviously, this must be done only as a last
TOC, Lean Manufacturing, MRP II/ERP and Capacity
One of my favorite quotes is "In technology, simplicity is the ultimate
sophistication." Effective Capacity management does not have to be
confusing or complicated. It does take a focused effort to find and solve
These "theories" are often presented as "either/or"
alternatives. The zealots in each camp claim their approach is the right
one and disavow the other two. The problem gets worse when half truths
and incorrect claims are made that incorrectly discredit the other two
concepts. For example, TOC advocates often claim MRP II/ERP assumes infinite
capacity. Not true. Lean Manufacturing advocates insist a Lean factory
does not need MRP II/ERP. Again, not true. Some Lean zealots have even
implied MRP II/ERP software is responsible for the wrong measurements such
as utilization. Unfortunately, these self-serving claims lead to unnecessary
confusion for the practitioner who is trying to make their supply chain
more effective. Their time gets diluted trying to avoid picking the wrong
buzz word horse to ride!
TOC focuses on many of the right issues, but is weak in providing tools
to fix them. For example, the cornerstone of TOCs Five Focusing Steps
is to identify the systems constraint, exploit it, etc. -- sounds
like a "buy low and sell high" recommendation from a financial
advisor! How can you do this without a good process of integrating sales,
distribution, new product launch, manufacturing and financial plans? A
business must have a good Sales and Operations Planning (SOP) process.
TOC discussions do offer some good ideas to bring focus on adjusting the
demonstrated capacity when needed and recognizing the need to deal with
the inevitable process variability. However, we don't need to get all tied
up in ropes, drum beats and become enamored with formulas to understand
the actions needed to meet the business goal -- cost effectively make all
we can sell, no more or less.
Lean or Flow Manufacturing also causes focus on many of the right issues
such as linking operations to create work cells. The result is less stopping
and starting and thus shorter internal lead times. Lean also focuses on
eliminating non-value added activities that reduce the demonstrated capacity.
Many Lean zealots imply all products can be made to order, eliminating
the need for forecasting. Some Lean advocates even imply Lean eliminates
the need for planning and software tools. Very seldom true. While some
products can be "finished-to-order," most customers wont
wait for delivery until we have time to order material from suppliers and
do all of the production work to get the product ready to ship. Again,
an effective SOP process is needed. Credible visibility of future capacity
requirements is essential and likely cannot be maintained manually.
ERP is simply an evolutionary derivative of MRP II. ERP includes powerful
tools to integrate departmental plans and provide visibility of future
capacity and material requirements, helping to locate the constraints soon
enough to find cost-effective solutions. Unfortunately, ERP is often implemented
as a software effort and the critical business processes are not addressed.
As with TOC and Lean, the key non-negotiable principles are ignored and
the results are disappointing. Bad idea? No, bad implementation and improper
use of the tools.
Ending the Confusion
The principles and stakes for effectively managing capacity are totally
independent of the product, process or Buzz Word of the Day. While TOC
and Lean Manufacturing can enhance the capacity management process, the
job can't get done with TOC and Lean Manufacturing alone. It requires ERP
Make your capacity management "sophisticated" -- aka, SIMPLE.
Focus on the universal five steps and the non-negotiable principle. Product
will flow profitably up the supply chain!