In procurement and supply, capacity management is a matter that should not be looked over. Good capacity management will prompt an organisation to achieve economies of scale and reduce waste. At the other end of the spectrum, flexible capacity management helps a business maximise its market opportunity and extend the market share.
So what is capacity? How can procurement professionals manage it?
You may meet the word ‘capacity’ in many difference context. For example, the following can be seen from news report:
- A power plant has capacity to generate 2GWh a year
- A restaurant can serve 100 guests per hour
- An airport has capacity to serve 2 millions passengers each year.
Though the above three are different entities, they all have some constraints on the output produced in a given time period (hour, day, month, year, etc.). The output in a given period is called capacity.
Economists distinguish different types of capacity:
- Design capacity is the maximum output that can be achieved in a given period with ideal conditions (i.e. The machine works 24/7 without downtime for maintenance)
- Effective capacity is the maximum output that can be achieved in a given period under current operating constraints
- Actual output is the actual results made in a time period.
Capacity management aims at moving the actual output as close as possible to design and effective capacity by leveraging current resources such as manpower, equipment and materials. The challenge for capacity management is how to increase a production unit’s capacity to maximum without increasing the costs to the point at which there is no overall financial benefit.
Why procurement should know capacity management
Managing capacity effectively is a good way to maximise profits and reduce costs per unit produced. When actual output reaches an optimal level, operational waste is minimised.
Procurement is a function that contributes greatly to capacity management. If procurement department knows its organisation’s capacity and capacity plan, it can make plan and communicate with suppliers to ensure that delivery of goods and services is made on time. Outsourcing is also a tool to increase short-term capacity. However, outsourcing has some inherent risks, such as the quality is not good as expected. Thus, to ensure effective capacity management, procurement must be able to control the suppliers’ performance.
With more and more complex supply chain, understanding your key suppliers’ capacities is not less important than knowing your own capacity. For example, your business receives 20% more orders, which your current capacity can meet. You must order 24% more materials from a key supplier. If the supplier cannot meet your order due to lack of capacity, your production line won’t have enough materials to operate and you will lose an opportunity to increase sales.
The above scenario shows the importance of managing capacities in the supply chain. This is an area that procurement professionals must pay attention to avoid any disruption in the supply chain.
Finally, any organisation that manages capacity poorly suffers diminished revenues due to unfulfilled orders, dissatisfied customers and decreased market share as a consequence.