What is 'Capacity Management'

Capacity management is the management of the limits of an organization's resources, such as its labor force, manufacturing and office space, technology and equipment, raw materials, and inventory. Capacity management also deals with the capacity of an organization's processes — for example, new product development or marketing — as well as with capacity constraints that arise when various resources are combined.

BREAKING DOWN 'Capacity Management'

The capacity of a business measures how much a company can achieve, produce or sell within a given period of time. For example, a call center can handle 7,000 calls per week, a café can brew 800 cups of coffee per day, a production line is able to complete 250 trucks per month, a service center can attend to 40 customers per hour, a restaurant has a seating capacity of 100 diners, etc. Since capacity can change due to seasonal demand, industry changes, unexpected economic events, maintenance and repair programs, etc., companies need to incorporate a system that ensures the ability to meet expectations at all times. This type of management process is referred to as capacity management.

Companies that integrate capacity management seek to ensure that adequate capacity is available at all times to meet current and future needs of a business and its consumers in a cost-effective manner. Capacity management requires a thorough understanding of how business demand influences demand for services, and how service demand influences demand on components.

Resources that may need to be adjusted depending on demand include on-hand inventory, labor capacity, service quality, office space, etc. Implementing capacity management may include working overtime, outsourcing business operations, purchasing more equipment, leasing or selling buildings, etc. A company with a poor management system which sees customer demand, even if sudden, not fulfilled runs the risk of losing revenue, market share and consumers.

Inadequate or improper capacity management can affect a company's financial performance and impede its business prospects. For example, a company that has introduced an innovative new product and mounted an aggressive marketing campaign to promote it must have enough manufacturing capacity to meet the expected surge in demand. If manufacturing capacity is insufficient, the product may be sold out before it is replenished in retail outlets, which could lead to a shortfall in sales and cause disappointed customers to look for alternatives at competing businesses. Since capacity constraints in any process or resource can be a major bottleneck for a company, capacity management is of critical importance.

In order to manage capacity, a company must factor in the proportion of capacity that is actually being used over a time period. For example, consider a company’s physical location operating at its maximum capacity of 500 employees across three floors of the building. If the company downsizes, reducing the number of employees to 300, it will be operating at a capacity of 300/500 = 60% utilization. 40% of its office space is left unused, which means that the firm is spending more on production or unit costs even if its output has decreased due to the reduced labor force. To save costs, the company might decide to allocate its labor resources to only two floors and end its lease of the office space on the third floor. If it does this, the company will reduce costs for building rent, insurance, utilities and any other costs associated with the additional floor.

While businesses usually aim to produce as close to full capacity as possible to minimize production costs and to ensure its capital is not tied to underutilized resources, there are some issues with operating at high levels of capacity. The company may not have the time needed to implement quality control on its products or services, machinery and equipment might break down due to frequent use, and employees may suffer from stress and low employee morale if they are required to work overtime for a prolonged period.

RELATED TERMS
  1. Capacity Requirements Planning ...

    Capacity requirements planning (CRP) is an accounting method ...
  2. Excess Capacity

    Excess capacity occurs when a firm's actual production is less ...
  3. Capacity Utilization Rate

    The capacity utilization rate is a metric used to measure the ...
  4. Fiscal Capacity

    Fiscal capacity, in economics, is the ability of government, ...
  5. Bottleneck

    A bottleneck is a point of congestion in a system that occurs ...
  6. Operations Management

    Operations management is the administration of business practices ...
Related Articles
  1. Investing

    What You Should Know About Risk Tolerance and Risk Capacity

    When deciding how to invest, you need to consider your risk tolerance and your risk capacity.
  2. Insights

    When Will the Recovery End?

    The U.S. economy is running out of the capacity to sustain growth. Two measures are especially revealing in this regard: the Federal Reserve’s (Fed’s) measure of industrial capitalization and ...
  3. Financial Advisor

    Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  4. Insights

    Google and Facebook to Build an Undersea Cable Between LA and Hong Kong (GOOG, FB)

    The Pacific Light Cable Network (PLCN) will be the highest capacity trans-Pacific route with 12,800 km of fiber and an estimated cable capacity of 120 terabits per second (or, the capacity to ...
  5. Investing

    A Look at The U.S Shale Oil Production Industry

    A convergence of sustained bank financing, falling production costs and rising oil prices might position the US shale industry for a greater market role.
  6. Investing

    Delta's 3 Key Financial Ratios (DAL)

    Learn why a smaller sales growth rate is actually good for an airline company such as Delta to achieve a better operating margin and higher stock valuation.
  7. Investing

    It's Finally Time To Bet On Solar

    After experiencing some of the worst years in its history, the solar energy sector could be having one of its best. New installed capacity is growing and will finally overtake wind energy in ...
  8. Investing

    Why $50 Oil Won't Be Sustainable (USO, XLE)

    Examine why the recent upswing in oil prices looks to be short-lived, and discover the dynamics between the increasing level of supply and diminishing demand.
  9. Managing Wealth

    Leveraging Leverage For Bigger Profits

    Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio.
  10. Investing

    The world's top 10 utility companies

    Learn who the Top Ten utility companies in the world are, along with tips for investing in the utilities sector.
RELATED FAQS
  1. What are the differences between period costs and product costs?

    Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center