Capacity Management: Definition in Business and Strategies

What Is Capacity Management?

Capacity management refers to the act of ensuring a business maximizes its potential activities and production output—at all times, under all conditions. The capacity of a business measures how much companies can achieve, produce, or sell within a given time period. Consider the following examples:

• A call center can field 7,000 calls per week.
• A café can brew 800 cups of coffee per day.
• An automobile production line can assemble 250 trucks per month.
• A car service center can attend to 40 customers per hour.
• A restaurant has the seating capacity to accommodate 100 diners.

Understanding Capacity Management

Since capacity can change due to changing conditions or external influences — including seasonal demand, industry changes, and unexpected macroeconomic events — companies must remain nimble enough to constantly meet expectations in a cost-effective manner. For example, raw material resources may need to be adjusted, depending on demand and the business's current on-hand inventory.

Implementing capacity management may entail working overtime, outsourcing business operations, purchasing additional equipment, and leasing or selling commercial property.

Companies that poorly execute capacity management may experience diminished revenues due to unfulfilled orders, customer attrition, and decreased market share. As such, a company that rolls out an innovative new product with an aggressive marketing campaign must commensurately plan for a sudden spike in demand. The inability to replenish a retail partner's inventory in a timely manner is bad for business.

Businesses thus face inherent challenges in their attempts to produce at capacity while minimizing production costs. For instance, a company may lack the requisite time and personnel needed to conduct adequate quality control inspections on its products or services. Furthermore, machinery might break down due to overuse and employees may suffer stress, fatigue, and diminished morale if pushed too hard.

Space Management

Capacity management also means calculating the proportion of spacial capacity that is actually being used over a certain time period. Consider a company operating at a maximum capacity that houses 500 employees across three floors of an office building. If that company downsizes by reducing the number of employees to 300, it will then be operating at 60% capacity (300 / 500 = 60%). But given that 40% of its office space is left unused, the firm is spending more on per-unit cost than before.

Consequently, the company might decide to allocate its labor resources to only two floors and cease leasing the unused floor in a proactive effort to reduce expenditures on rent, insurance, and utility costs associated with the empty space.