What Is Capacity Planning? Definitive Guide to Top Business Strategies

Lucija Bakić

November 10, 2023

Learn all about capacity planning: the strategic approach to meeting business resource requirements.

Discover the best strategies and best practices to get the most out of your employee capacity and other key resources.

Key Takeaways

  • Capacity planning is the process of determining the resources and capabilities necessary to meet business demands.
  • Developing a capacity planning strategy involves creating a resource plan by analyzing and forecasting business capacity, documenting it, and using best practices for implementation.
  • Best practices include: managing your resource pool with balanced scheduling and capacity-building initiatives, reviewing progress with real-time business metrics, and focusing on continuous iteration and improvement.
  • Capacity planning software can help you streamline the process of managing resources by streamlining administrative work and forecasting key business insights.

What Is Capacity Planning? Definition & Examples

Capacity planning is the strategic process of determining the production capacity needed to anticipate and meet customer demand.

It involves thoroughly analyzing business resources, such as facilities, finances, and employees, identifying potential bottlenecks, and assessing how these resources are being utilized.

Some practical examples include:

  • Manufacturing: A manufacturer can evaluate its production line capacity to find process bottlenecks. By analyzing machine capacity, labor availability, and material constraints, manufacturers can implement strategies to maximize facility utilization.
  • Professional Services: Human resources are an agency’s most valuable form of capacity. Agency professionals, project managers, and other staff in leadership positions can forecast historical performance on projects, such as delivery time, client satisfaction, and profit margins, to decide whether additional or fewer resources are needed for new projects.

The Goals of Capacity Planning

Effective capacity planning ensures that resources are not wasted or underutilized, leading to improved financial performance, higher client satisfaction, and increased team productivity.

Ultimately, it provides a roadmap for organizations to optimize their operations, making it a critical tool for businesses across various industries.

Main Types of Capacity Planning

We can distinguish three main types of capacity planning, depending on your business outlook, timeframe, and specific strategies employed:

  • Long-term or Strategic Capacity Planning (also known as long range capacity planning) considers future requirements over several years. It involves strategic workforce capacity planning carefully aligned with business goals and growth. The main strategies include supply and need forecasting.
  • Short-term or Operational Capacity Planning focuses on addressing immediate capacity needs, usually ranging from days to months. It’s a reactive strategy that aims to resolve momentary resource gaps and conflicts to ensure smooth operations. Strategies include scheduling, workforce management, and day-to-day optimization.
  • Medium-term or Tactical Capacity Planning bridges the gap between strategic and operational planning. It considers the medium-term timeframe, from a few months to a year, and includes elements of both strategies — scheduling, forecasting, utilization tracking, and strategic planning.

All three of these capacity planning processes are complimentary, both with each other and the broader business context.

Capacity Planning: Key Terms and Concepts

  • Bottlenecks: A bottleneck is a part of the capacity planning process that isn’t progressing smoothly. This could be due to a lack of resources, either in quantity or quality. Capacity planning helps identify and resolve these situations before they impact business operations.
  • Resource Utilization: One of the main metrics for capacity planning success. High utilization indicates high efficiency — for machines, it indicates maximized output, and for employees, billable hours worked (see more: contracted hours vs actual hours).
  • Billable Hours: The number of hours worked that can be charged to clients. The balance between billable and non-billable hours is key for client-facing agencies.
  • Demand forecasting: Anticipating future demand for the organization’s services. Demand forecasting supports planning capacity and ensures that there are enough resources to meet client needs and resolve resource conflicts.
  • Workload Forecasting: Similarly to demand forecasting, workload forecasting is another way to anticipate and resolve future demand. It predicts employee workloads to ensure the organization has enough staff with the right skills to meet client needs.
  • Human Resource Planning: Ensuring that the organization has enough staff and that they are allocated effectively. Human resource planning strategies include talent management, retention & acquisition, workload management, and scheduling.
  • Overhead Management: Includes the management of various non-billable expenses needed to run your businesses. Managing non-billable hours and overhead costs is essential to maintaining profitability, and it requires careful capacity planning.
  • Business continuity: Ensuring that your organization can continue to operate and deliver services to clients even in the face of disruptions. 
  • Project Management: Includes the management of tasks and overall project initiatives. Capacity planning is vital in allocating the right resources at the right time to ensure successful project planning and management.
  • Critical path: The critical path is a project management term that refers to the sequence of tasks necessary to complete a project. Managing the critical path of a task can ensure that unexpected resource conflicts can be accounted for without impacting overall deadlines and quality.
  • Capacity report: A capacity report is a strategic tool that provides a clear picture of the team’s available bandwidth and resources at any given time. By detailing current project allocations, upcoming commitments, and individual availabilities, it enables informed decision-making, realistic project timelines, client expectation management.

Capacity Planning vs Resource Planning

Capacity planning can be seen as a process that evaluates the output your business operations can achieve by managing constraints in resource capacity.

Resource planning is a more narrow concept that focuses on how resources can be managed and manipulated to meet actual demand.

In short, we can say that capacity planning is strategic, while resource planning is tactical. However, keep in mind that different types of resource capacity planning processes might impact this definition.

Additionally, as the two concepts are closely related, the specified differences can vary depending on your source.

Learn more in our guide to effective resource planning.

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Key Benefits of Capacity Planning

According to the 2023 Agency Insights Report, the main pain points for businesses include:

  • Managing project profitability and margins (16%)
  • Managing workload and ensuring proper resource utilization (14%)
  • Finding and addressing inefficiencies in process and workflow (13%)
  • Dealing with scope creep and change requests (12%) 

Capacity planning addresses all of these critical issues, with benefits that include:

Optimized Resource Allocation

Optimized resource allocation means that your resources are well-balanced across multiple projects. For human resources, this includes considering various factors, such as their availability or working hours, seniority levels, and even personal traits such as particular skills or affinities.

All of these can contribute significantly to preventing burnout and improving job satisfaction.


WITH PRODUCTIVE’s reporting, YOU CAN EASILY CHECK AND MANAGE YOUR TEAM UTILIZATION

One of the best ways for managing resources across multiple projects is to track your utilization rates. The standard for production-level staff is somewhere between 70 to 90%, depending on your specific industry (Promethean Research). 

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Improved Project Management and Delivery

With a well-executed capacity plan, a capacity planner can accurately anticipate project demands and delegate tasks based on team availability and skills.

Considering that a majority of project managers handle between 2 and 5 projects at the same time (RGPMI), it’s essential that this resource plan allows for easy context switching and resource reallocation.


PRODUCTIVE SUPPORTS SUCCESSFUL OUTCOMES WITH CUSTOMIZABLE PROJECT VIEWS

Ultimately, good capacity planning means that you’ll be able to deliver projects on time and within scope more reliably. If you need more convincing, research in financial services shows that a 5% increase in customer retention produces more than a 25% increase in profit (Bain & Company).

Financial Benefits

When adopted strategically, capacity planning can yield significant financial benefits. In fact, according to a study performed in the SaaS industry, efficient capacity planning can improve overall agency profit by as much as 10% (ResearchGate).

In particular, using advanced resource management software can help you get real-time insights into key metrics, as well as predict your future business performance.

One way to get a pulse on the business is to get the monthly financials, but for the monthly financials to come in, it takes the accounting department about 15 days after the month ends before we get a picture of how we really did that month. Whereas, with the financial tools that Productive offers, you can check it on a daily basis. We have clear visibility at any given time.

Orion Jensen,
CEO AT CLEAR LAUNCH

Key financial benefits of automated capacity planning include:

  • Improved Financial Forecasting: Capacity planning provides crucial data that enhances accuracy in financial forecasting and budgeting.
  • Profit Maximization: By aligning capacity factors with demand, businesses can maximize their revenue potential and save on costs.
  • Reduced Risk: Effective capacity planning minimizes financial risks associated with over or under-utilization of resources.

Strategic Business Planning

Capacity planning is a crucial tool for forecasting future needs. By planning resource availability for the future, you can identify exactly when and which resources you’ll need to support expansion.

For example, agency professionals can also decide which client projects to take on or guide their sales strategy by targeting underutilized services.

We have team X, whose Scheduled/Available ratio is 110% when looking into the upcoming quarter. This means that we’ll need an extra 10% of our current capacity to be able to do the work we have scheduled. Then we translate those percentages into the numbers of full time employees we actually need and signal this to HR so that they can start with the hiring process.

Find out how to manage 350+ people with Productive, the ultimate tool for agencies.

By aligning your capacity planning with your strategic planning, you can support improvements at all levels of your business management.

Learn more about finite capacity planning methodology to optimize your production scheduling.

Enhanced Agility and Flexibility

Capacity planning allows for enhanced agility and flexibility, which empower businesses to respond to evolving market conditions and client demands.

By maintaining a firm grasp on capacity and availability, your business can more easily align its strategy with current industry realities. Additionally, improved utilization means that less time is spent on administrative or repetitive tasks, which promotes employee engagement and, in turn, employee retention.

Data-Driven Decision Making

Capacity planning supports informed decision-making by providing two main benefits: generating key insights on your time, money, and resources, and providing enhanced visibility into all three.

According to the Global Agency Landscape 2022 Report, most businesses miss out on tracking their business health in real time — for example, only 43% reported tracking their forecasted revenue, and as few as 18% manage their project budget burn rate.

This means you can leverage your resource capacity planning data to get a competitive edge in the professional service landscape. Analyzing your key business insights will help improve project transparency and accountability, contributing to lasting client relationships.


BENEFIT FROM productive’s ADVANCED project budget and FINANCIAL MANAGEMENT

Building Resilient and Sustainable Operations

Finally, resilience and sustainability are both synonymous with strategic capacity planning. With a resource plan that encompasses the real picture of your organization’s resources, you’ll be able to gauge the periods in which your resources are at risk of being overutilized.

This promotes proactive adjustments, as well as sustainable business practices. With a reactive resource plan that adapts to potential changes, you’ll also be better equipped to withstand the various uncertainties and challenges associated with maintaining efficient business operations.

Downsides of Poor Capacity Planning

On the flip side, the downsides of ineffective product capacity planning include:

  • Increased Operational Costs: Excess capacity leads to spending on resources that don’t contribute to achieving business goals.
  • Reduced Customer Satisfaction: Inability to meet customer demand results in dissatisfaction and potential lost of future business.
  • Lower Employee Morale: Unbalanced workloads can lead to overburdened or underutilized staff, leading to burnout or decreased job satisfaction.
  • Missed Opportunities: Inability to scale operations sustainably may result in missed market opportunities and decreased quality of current demand.
  • Supply Chain Disruptions: Inadequate capacity planning can cause bottlenecks, affecting the entire supply chain.

Different Types of Capacity Planning Strategies

Capacity planning strategies include the Lead, Lag, Match, Adjustment, and Hybrid Strategy. Each capacity planning strategy has its distinct advantage and is applied according to specific business needs and circumstances.

Lead Strategy

Lead strategy is a proactive strategy that consists of increasing capacity before it’s needed in order to stay ahead of demand. When it comes to challenges, utilizing lead strategy requires:

  • Deep understanding of market trends and demand prediction
  • Accurate insights into current resources and utilization
  • Knowledge of specific agency dynamics

A common example includes businesses that produce seasonal products, such as ice cream — these industries can use historical data to increase capacity in anticipation of higher customer demand.

If a lead strategy fails, it may result in decreased utilization rates and higher overhead. If it succeeds, it usually means gaining a competitive edge, leading to higher customer satisfaction and potential market share gains.

Lag Strategy

On the other hand, lag strategy is a reactive approach that entails adding capacity after demand has exceeded resource availability. While this strategy may be cost-effective in the short term, it can lead to decreased client satisfaction and loyalty in the long run.

Therefore, it’s necessary to monitor the critical path of resources — the point at which resource constraints will negatively impact your client relationships — and respond to it quickly. For example, certain industries that experience high peaks and low plateaus throughout the year, such as consulting agencies, might resort to mandatory overtime to compensate for high demand, necessitating efficient tracking and scheduling through consultant management software.

Match Strategy

Match strategy involves adjusting your capacity in line with demand. It avoids the risks of both lead and lag strategies, including overinflating resources or causing client churn. However, a match strategy is the most difficult to implement in hard-to-predict industries, such as the professional services market, as it requires careful monitoring of industry patterns and high flexibility.

The main steps of a match strategy are:

  • Staff management: Adjusting the number of employees to match demand.
  • Supply management: Regulating supply to match demand, avoiding excess or shortage.
  • Equipment utilization: Maximizing the use of resources to match demand levels.
  • Dynamic adjustment: Continual review and adjustment of capacity to ensure optimal efficiency.

Adjustment Strategy

The adjustment strategy aims to match demand with capacity by introducing adjustments to specific processes or systems. The most frequent way to utilize the adjustment strategy is by hiring part-time employees or freelancers to cover periods of higher demand. Although this provides a high level of flexibility without the complexity of using a match strategy, it may lead to issues with consistency and quality.

The high turnover rate and the use of unskilled employees both contribute to a high error rate, which means that more supervisors are needed to ensure that jobs are performed according to specifications.

Source: Match Supply and Demand in Service Industries

Therefore, agencies that use the adjustment strategy should develop strategies to mitigate risks, such as a reliable contractor onboarding process.

Hybrid Strategy

A hybrid strategy involves tailoring your capacity planning by combining elements of multiple approaches. This strategy offers a balanced and customized approach, capturing the benefits of multiple strategies while mitigating potential drawbacks. The challenge of using a hybrid strategy is that it requires a certain level of agility and flexibility in your business operations, as well as careful planning and analysis.

Using a hybrid strategy might look something like this:

  • Using a lead strategy during periods of anticipated demand increase
  • Employing a lag strategy when demand is expected to decrease
  • Applying a match strategy for stable demand periods
  • Implementing an adjustment strategy to account for unpredictable fluctuations

Scenario Planning

Scenario planning is one of the most crucial processes for businesses that want to successfully implement their capacity planning. With scenario planning, you can more easily employ a hybrid strategy or a contingency approach that tailors capacity for fluctuations in demand.

Scenario planning is most useful for organizations that:

Operate in uncertain conditions and want to manage risk factors;
Use a process that combines strategic analysis with creative thinking;
Allow for thinking about future outcomes while taking action in the present.

Source: Scenario planning: Reflecting on cases of actionable knowledge

This strategy’s primary advantage lies in its ability to prepare organizations for various possibilities, ensuring readiness for different future states. However, it can be challenging to implement due to the time-consuming and complex process of developing several comprehensive plans.

Developing & Implementing a Capacity Planning Strategy

This process of creating a capacity planning strategy includes:

  • Defining your capacity planning strategies
  • Creating a capacity planning document
  • Implementing your capacity plan

1. Defining Your Capacity Planning Strategies

Considering the unique operational structure, goals, and capacity planning challenges of your business is crucial for successful capacity planning initiatives. Key stakeholders should be involved in this process to align the capacity planning efforts with overall business objectives.

Here are the essential steps to follow:

  • Analyze the current capacity and identify gaps.
  • Forecast future capacity needs based on business goals.
  • Plan for capacity adjustments to meet those goals.
  • Implement, monitor, and adjust the strategy as needed.

Consider implementing your strategies across short, mid-term, and long-term initiatives. This includes making sure that you’re handling your capacity on a day-to-day, quarterly, and even yearly basis.

Many organisations have a day-to-day planning method where all detailed tasks are allocated with usage of planning software to individuals. In these organisations a medium-term-resource-allocation is not used. But to couple the day-to-day planning to the strategic business plan, this medium-term-resource-allocation is absolutely necessary.

Source: Human resource allocation in a multi-project R&D environment: Resource capacity allocation and project portfolio planning in practice

How far you’re able to look into the future can depend on your specific industry or agency circumstances, but this is a good rule of thumb for achieving efficiency in operations management

2. Creating a Detailed Capacity Plan

After identifying capacity gaps and forecasting future needs, creating a resource capacity planning template becomes the next critical step. This plan contains a detailed layout of strategies to optimize resource usage.

To start, outline all resources and their current usage levels. Then, map these against anticipated needs. Identify any surplus or shortfall and devise ways to reallocate or augment resources accordingly.


an example of a real-time resource plan created with productive

Your plan should be flexible, accounting for potential changes in demand or resource availability. Include contingency plans to manage unexpected situations.

Ensure your plan is clear, concise, and easily understood by all stakeholders. Regularly review and adjust your capacity plan to maintain its relevance and effectiveness in meeting your organization’s evolving needs.

Optimize Your Agency’s Capacity Planning

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3. Implementing a Capacity Plan

Key steps in the capacity plan implementation process include:

  • Mobilization: Assembling a dedicated team to oversee the implementation.
  • Communication: Clearly articulating the plan to all involved parties, ensuring everyone understands their roles.
  • Execution: Launching the initiative and monitoring its progress closely with key performance indicators.
  • Review: Regularly revising and adjusting the plan to respond to changing conditions and objectives (you can also consider a root cause analysis to optimize your project scheduling).

Best Practices for Capacity Planning

Implementing successful capacity planning usually requires having both a strategic and innovative mindset through:

  • Having a firm grasp on your resources in the context of broader business initiatives.
  • Having the flexibility to adjust your approach according to changes and demand fluctuations.

In practice, this includes:

Managing Your Resource Pool

Balancing workloads is crucial to prevent burnout and ensure productivity. Capacity building strategies such as upskilling and reskilling are vital for adapting to evolving demands. Engaged employees, empowered with the right skills, contribute more effectively to the organization’s success. 

Project Prioritization

Not all projects can receive equal attention. Focusing on the most profitable ones, which can be identified through metrics such as profit margins, ensures resources are allocated to initiatives that offer the greatest returns.

Utilizing Real-Time Data

For a successful capacity planning strategy, defining strategy-specific KPIs is essential. Examples of capacity planning KPIs include machine utilization rates in manufacturing and throughput in IT capacity planning. Access to real-time data is critical for making informed decisions and adjusting strategies as needed.

Focusing on Change Management

The perfect resource plan and implementation process are myths. It’s usually more beneficial to start implementing a plan as soon as it’s ready and then iterate over time. Capacity planning should be an ongoing process, regularly refined based on outcomes and feedback to better meet business needs and adapt to market changes.

Investing in Capacity Planning Software

This technology supports all the above practices by facilitating workload balancing, project prioritization, and the collection and analysis of real-time data. Additional benefits include automating workflows, enhancing visibility across projects, and improving communication within teams.

Using Capacity Planning Tools & Software

Capacity planning software can bring various benefits to your business processes. A top example of ERP software for professional services is Productive, an all-in-one tool for agencies of all shapes and sizes.

Designed to be the single source of truth for agency workflows, Productive combines capacity planning, budgeting, and project management to deliver full operational and strategic support.

Key features include:

  • Time Tracking: Productive supports the tracking of billable and non-billable hours with an integrated timer, manual time entry, and even automatic timesheet creation based on your resource scheduling.
  • Capacity Planning: Create highly detailed resource plans that take into account holidays and agency-specific employee leave. Support your scenario planning and project delivery by forecasting your project budget burn and profitability margins, as well as checking utilization across various key metrics.
  • Financial Management: Build and manage your budgets on Productive, whether fixed, hourly-priced, retainer, or hybrid. Manage hourly rates, generate brand-friendly invoices, and handle your external expenses with purchase orders, all on one platform.
  • Reporting: Productive offers more than 50 agency-focused templates that you can populate with additional parameters thanks to custom fields. Get the benefit of accurate, real-time data at your fingertips.
  • Project Management: Get full visibility into your project progress and handle your task management. Customizable notifications will help you stay on top of updates on whichever platform you prefer to use.
  • And more: Sales, Docs, Productive AI, Automations, Permission Builder.

Businesses use Productive to support their daily and strategic operations. Book a demo today to find out what Productive can do for you.

FAQ

What is meant by capacity planning?

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products or services.

What is an example of capacity planning?

An example of capacity planning is a marketing agency hiring contractors or additional staff in order to meet increased client demand for content strategy and creation.

What are the four types of capacity planning?

The four types of capacity planning are lead strategy, lag strategy, match strategy, and adjustment strategy.

What are the three steps in capacity planning?

The three steps in capacity planning are:

  • Forecasting future business activity.
  • Evaluating existing capacity and resources.
  • Making decisions to achieve a balance between resources and demand.

What is the difference between capacity planning and management?

Capacity planning is the process of predicting future needs, while capacity management involves maintaining the balance between supply and demand by managing resources effectively.

What are the key decisions of capacity planning?

Key decisions include determining the amount and timing of capacity changes, selecting the type of technology to use, and deciding on workforce size and skill levels.

What are the pros and cons of capacity planning?

Pros include improved operational efficiency and customer service, while cons can involve the costs and complexities of adjusting capacity and the risk of inaccurate demand forecasting.

What is capacity planning for employees?

Capacity planning for employees involves a workforce planning process that aligns workforce capabilities and size with the agency’s expected demand for talent, considering factors like turnover, skill needs, and labor market trends.

What is an example of HR capacity planning?

An example of HR capacity planning is an HR department forecasting the need for new hires based on retirement rates and business growth projections.

What are the two stages of capacity planning?

The two stages of capacity planning are the initial stage, where capacity requirements are estimated, and the execution stage, where the plan is implemented and adjusted as needed.

What is the structure of capacity planning?

The structure of capacity planning typically involves demand prediction, current capacity assessment, and action plans for addressing capacity gaps.

How do you conduct capacity planning?

Conducting capacity planning involves:

  • Analyzing historical data to forecast demand.
  • Assessing current capacity.
  • Identifying gaps between current capacity and future needs.
  • Developing strategies to fill those gaps.

What is a key element in capacity planning?

A key element in capacity planning is accurate demand forecasting, which is critical for aligning capacity with business needs.

What is the first step in planning capacity?

The first step in planning capacity is to forecast future demand for products or services, which forms the basis for all subsequent planning activities.

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Lucija Bakić

Content Specialist

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