Capacity Planning for Small Businesses: What It Is and How to Do It

Capacity planning is the process of balancing your available resources with actual or anticipated demand. Here, we discuss common capacity planning strategies and some best practices.

Updated July 30, 2020

Assembling the best team requires planning, data analysis, and some people skills. But unfortunately for team leaders, even the best team has a limit — there’s no such thing as superhuman strength, after all.

People grow tired after prolonged hours of work. Productivity takes a nosedive. Even technology and machines have to stop at some point for repairs and maintenance.

So if, by some stroke of luck or marketing genius, you suddenly find your company’s products or services in high demand, lacking the resources to satisfy client requirements is bad news.

This is where capacity planning steps in.

Overview: What is capacity planning?

Resource scarcity is a problem many businesses face, no matter their size or their industry. Even so, project ideas abound. Because projects cannot survive without adequate resources, companies have to be careful about which ones they choose to undertake.

And when they do consider launching a new project, one of the first questions that gets asked is: “Do we have the capacity for this?”

This is because the ultimate success of your venture hinges primarily on your ability to complete projects on time, on budget, and according to the agreed-upon quality parameters contained in the scope of work.

But what is capacity, exactly?

In project management, capacity is the maximum amount of work an organization can complete within a typical work schedule.

The capacity planning process balances supply with demand and involves moving things around to match available resources (supply) — people, equipment, tools, etc. — with the work required (demand). The goal is to get as close to capacity as possible — to maximize available resources and complete projects sooner.

Capacity planning vs. resource planning: What's the difference?

Capacity planning and resource planning, although related, are two different things. The former is done on an organizational level, while the latter is done at the project level.

Capacity planning determines how much capacity your company needs to meet varying customer demands. It tells you if your organization has enough people with specific skill sets, whether additional hiring is necessary, and if certain projects should be approved, cancelled, or put on hold.

Capacity planning benefits include:

  • Skills shortage identification: An inventory of the skills your staff has will come in handy when matching work with resources. It also helps you uncover which skills you need but currently don’t have.
  • Better business planning: A solid understanding of your organization’s capacity lets you know what you can and cannot accomplish. Therefore, you’re better able to identify which types of projects to accept and when to say no.
  • Cost savings: If you know the availability, skills, and hourly rates of everyone in your resource pool, you can confidently postpone — or expedite — certain projects to reduce overall resource costs.

Resource planning, on the other hand, is a project planning process that involves determining the resource types and quantities to perform project activities, allocating the right resources to the right tasks, and making the necessary resource adjustments to reflect changes in project scope, staff availability, priorities, and timelines.

With sound resource planning, you can:

  • Make better project plans: Better planning means more effective resource plans and more realistic project timelines.
  • Distribute workload fairly: Even workload distribution helps you avoid the ill effects of resource underutilization (insufficient resource use) and overallocation (more assignments than a resource can handle).
  • Increase project productivity: When the right people and resources are assigned to the right jobs, you optimize resource usage and maximize productivity per work shift.

Capacity planning strategies

There is no one way to plan for capacity. Here are some of the most commonly used capacity planning techniques.

Lead strategy

A lead strategy involves adding capacity in anticipation of a huge demand increase. It’s the most radical or aggressive production capacity plan and suits companies in high-growth industries, as well as companies that plan to take away customers from competitors that cannot currently serve them.

The problem with this approach is that the anticipated demand may not materialize.

Lag strategy

The opposite of a lead strategy, a lag strategy involves increasing capacity only when there’s actual, true demand for a company’s products or services. This capacity planning model is the most conservative and generates the best ROI, as it prevents businesses from paying for excess capacity.

However, not having enough resources to meet a sudden spike in demand can also mean losing current and potential customers to the competition.

Match strategy

Smack in the middle of lead and lag is the moderate match strategy, which adds capacity incrementally depending on what the market requires. It’s a low-risk capacity planning method suitable for many business types but involves constant market monitoring for shifts in demand.

Adjustment strategy

With the adjustment strategy, you can adjust as needed — meaning you can add or reduce capacity in small or large quantities as needed.

5 tips for capacity planning in your small business

How do you plan for capacity in your small business? Let’s take a look at some best practices.

Tip 1: Know your organization’s resource capacity

To understand your company’s current resource capacity, consider asking these questions:

  • How are resources being used? Where are they being used?
  • Are there spare resources to meet critical project dates?
  • Does the company have more resources than necessary?
  • Is there a skills gap that needs to be filled through training or hiring?
  • Are there people available to handle more work? If so, how much time can they dedicate to other projects?
  • Can the organization take on more projects?

Tip 2: Establish cross-functional teams

A cross-functional team brings people together from different departments to collaborate on shared projects. Each person comes to the team with different skill sets, experience, and expertise.

Done right, cross-functional teams enable organizations to maximize staff utilization and productivity across projects and portfolios.

Tip 3: Allocate resources according to project priority

Priorities differ between organizations. What’s valuable to one may not be as valuable to another. Once you’ve determined which projects in your portfolio provide the most business value, prioritize them further by determining which are important and urgent. The prioritization matrix can help with that.

Tip 4: Break the project down into bite-size chunks

A work breakdown structure is an essential project management tool for dividing a project into deliverables, which you can further break down into tasks.

Once you know the individual tasks that make up a project, you’re better able to determine which resources — both people and physical resources — are best for each.

From there, you can start calculating and comparing, e.g., required employee hours vs. available employee hours, then make the appropriate capacity planning decisions, such as:

  • Postponing the project, if a key resource is currently unavailable or cannot fully commit to the project because they’re tied up somewhere else
  • Outsourcing work that in-house personnel cannot complete on time
  • Hiring more people, either temporarily or on a full-time basis

Tip 5: Use capacity planning tools

Most project management software platforms have resource management capabilities that provide real-time information on resource availability and workload. Other essential capacity planning features include:

  • Skills tracking
  • Resource demand forecasting
  • Scheduling and allocation
  • Utilization management
  • Resource request tracking
  • Capacity reporting

These tools are also useful for determining when to retrain staff and hire additional people to improve organizational capacity.

Use capacity planning to successfully deliver projects

Ultimately, the goal of capacity planning is to create a balance between customer demand and the best use of your company’s resources. As for projects, factoring capacity into the project plan ensures you have the right resources to complete the required work on time.

LOTS TO CONSIDER, LET US HELP

Get The Blueprint’s latest recommendations by signing up to our free newsletter.

The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.