Capacity Planning in Manufacturing: Demand-Driven Capacity Management

Michael Parent
Consulting Services

If there’s one thing that manufacturing companies that survived the last five years have learned, it’s that capacity is everything, The biggest concern that most operations divisions have is “Can I meet customer demand?” But today's global marketplace makes answering that question incredibly complex. Capacity management necessitates that operations executives and plant managers focus on making sure they have just the right capacity for the right product at the right time.

The manufacturing industry is feeling that impact of turbulent market conditions: 55% of manufacturing companies reporting that they’re currently dealing with volatility within their organizations.

Flexibility to endure volatility is essential for manufacturers and their workers. Natural disasters, supply chain delays, labor issues, consumer behaviors, and economic uncertainty all need to be accounted for when coming up with a business plan that ensures flexibility, resiliency, and the ability to meet changing customer demands.

To address this urgent need to reboot manufacturing strategies, SafetyChain’s e-guide series, Customer-Driven Production: Setting New Operational Standards to Meet Future Demands and Disruptions, helps operational leaders prepare for the future by optimizing three critical areas of capacity: management, scheduling, and reliability.

The first e-guide of this series, Implementing Customer-Driven Capacity Management, addresses how to increase production capacity in manufacturing by using the right manufacturing capacity planning tools. In this blog, we'll explain the reasons behind one of several key fundamental principles discussed in the e-guide

Topics include:

  1. Smart Manufacturing: Capacity Planning Tools

  2. Takt Time Essentials for Capacity Planning
    a. Increasing Production Capacity

  3. Demand-Drive Capacity Planning

Smart Manufacturing: Capacity Planning Tools

Average methods yield average results, if you're lucky.

Sales and manufacturing are intertwined in their shared need to have the right quantity of the right stock at the right time. The old-school method of determining these magic numbers was to gather interdepartmental notes and spreadsheets to average out historical sales and production rates over a long period of time. However, averaging historical data for capacity planning in manufacturing isn’t just less than optimum, it’s a disaster waiting to happen.

The problem with driving demand to an average is that roughly 50% of the time the output will be too low to meet the expectations.

Averaging consumer demand to plan for capacity is a ticking time bomb. Sure some waste is inevitable, and shortages are part of supply chain realities that companies need to be prepared to deal with, but a 50% success rate isn’t good enough and can be disastrous when a worst-case scenario strikes.

Among survey respondents, all automotive and nearly all (97%) industrial products companies said the pandemic negatively affected them.

The top companies that know how to increase production capacity in manufacturing have replaced averaging historical paper trails with a significantly more scientific manufacturing capacity planning tool: Takt time.

Let’s Talk Takt Time.

Takt time is the rhythm, or heartbeat, at which an organization should operate.

MIT Leaders for Manufacturing (LFM) Program

Takt time, the production pace needed to keep up with consumer demand, is a far superior metric to drive capacity planning in manufacturing. The calculation is simple: the available production time divided by the number of units demanded by consumers within the same time period. This yields the amount of time businesses have to produce each unit to keep up with customer demand.

Unlike cycle time, which dictates how much time is needed to make one unit of production output, Takt time is a customer-focused metric that requires real-time data for optimum results.

Only knowing what your production rate is on average means:

  • a 50% failure rate to match production to demand,

  • waste and unnecessary expenses when manufacturers overproduce,

  • shortages, bad press, and customer complaints when manufacturers underproduce,

  • and crises during periods of volatile consumer demands, labor shortages, supply chain delays, natural disasters, and economic uncertainty.

Many businesses believe that waste is inherent, and it’s better to overproduce rather than underproduce  keeping a stash of excess inventory tucked away “Just in case.” This is true to an extent, however, it’s also the major limiting factor in impeding growth because of the snowball effect of inefficiencies overproduction typically causes. These silent bottom-line killers often go undetected because of their seemingly unrelated nature and the common misconception of allowing more waste than necessary.  

Transitioning from “just in case” to “just in time”

Not only does Takt time enable manufacturers to meet the increased demands of consumers, it also helps eliminate waste by not producing more than necessary based on real-time consumption data. Storing huge amounts of inventory “Just in case” is unnecessarily expensive and not even necessarily going to cut the mustard if consumer demand suddenly skyrockets.

The Great Toilet Paper Panic of 2020 was marked by sales increases of up to 734% compared to the previous year and total stock depletion at 70% of U.S. grocery stores, despite consumers only "needing" 40% more toilet paper at home.

Pivoting to a “Just in time” manufacturing mentality, a term coined by the Toyota Production System (TPS), utilizes Takt time and lean manufacturing principles to maximize production by eliminating waste.

Developed during the decades following World War II, the TPS has been a pillar of excellence for the manufacturing industry since popularized in the Western world through the 1990 management classic The Machine That Changed the World. The TPS identifies several critical areas of waste, which have been adapted to the acronym, DOWNTIME.

Overproduction is notably the largest source of waste because it can have a snowball effect on one, multiple, or even all of the other sources of waste. It inherently causes extra processing, excess inventory, and time on hand. Producing too quickly can lead to mistakes like defects, repetitive motion injuries for workers, and burned-out equipment. It also leads to missed opportunities to capitalize on workers’ other skill sets that may have lucrative benefits especially when utilized at the right time.

Basically, stop overproduction, and you significantly limit the risk of all other major sources of waste. The best way to stop overproduction is to use data to figure out how much you truly need to be producing to meet the needs of your customers (i.e., Takt time), and the best way to determine demand is to use real-time data — especially during a time defined by ever-changing flux.

72% of manufacturing executives say data-driven strategies are more important now than they were three years ago.

Real-time data also enables companies to be prepared to meet volatile customer demands and prevent shortages when demand increases, staying ever flexible and resilient to whatever the supply chain, labor market, or economy may bring.

How to increase production capacity in manufacturing with Takt time

Demand-driven manufacturing capacity planning tools are needed to yield the most accurate Takt time. Equipped with manufacturing capacity planning tools that feature agile capabilities to adapt to changing market needs, manufacturers arm themselves with the best defense possible for a constantly changing consumer landscape.

The right technology will capture all critical data and empower organizations with digitized, real-time visibility across the entire organization.

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Real-time data

The concept of “old data is bad data” isn’t a new one, nor is it a concept subject to much debate.

Over 75% of organizations agree that untimely data inhibits business opportunities.

What’s new is that we now have the technology available for real-time data, which is a complete game-changer in how businesses respond to future demands and disruptions.

Still convinced historical data has worked for your company for x-years and there’s no need to invest in an upgrade? Consider this simple fact: real-time data is here, and your competitors either have it already, or will have it soon, because this isn’t technology that’s going away.

“If you’re not already connecting, consolidating, and analyzing your data in real-time for your business to become a learning- and knowledge-based organization, you can be sure that your competitors will be soon if they haven't already.”

Craig Strong, Innovation & Product Enterprise Practice Manager at Amazon Web Services

This is one of several major reasons why there is so much controversy surrounding AI. The only questions that should be asked of AI can be easily verified for accuracy either through the knowledge of a subject matter expert or through reverse engineering the data the software was fed to obtain the same conclusion. 

Digitized data

By the time you have your Monday meeting to share interdepartmental reports, that data is already old news. And that’s assuming the data was accurate to begin with, which is often not the case when human error is in the mix.

When relying only on manually-produced reports, manufacturers limit themselves to 40% of their total production capacity — at best.

Digitizing your data with software that supports automation gives all collaborators access to the same information at the same time, ensures reporting accuracy, eliminates the risk of competing data sources from organizational silos, and puts sales and manufacturing teams on the same page at last.

Prepare for volatility with demand-driven capacity planning in manufacturing.

Learning how to increase production capacity in manufacturing can’t happen overnight, but it can save your business when disruptions strike. In Implementing Customer-Driven Capacity Management, SafetyChain explains the paradigm shift to real-time, demand-driven data for capacity planning in manufacturing. The e-guide reveals several key principles for achieving more resilient, operational flexibility and provides a detailed capacity management roadmap to flourish even during the most tumultuous of times.

Are you prepared to meet future changes in customer demand? Read the e-guide now.

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About the author: Michael Parent is a management consultant and Principal of Michael Parent Consulting Services. He is a Lean Six Sigma Master Black Belt and was named a 40 Under 40 "Rising Star" by the American Society for Quality. Throughout his career, Michael has coached executives through strategic problem-solving and operational excellence and has led continuous improvement projects in a myriad of manufacturing sub-industries.