Operational Capacity

Why Operational Capacity Matters When Growing

By Matt McDonald
9 Min Read

Recently we wrote about why businesses need to know and manage constraints, especially when they are growing.  Constraints are in many ways the flipside of capacity, where business operations are concerned, because increasing operational capacity will generally decrease constraints. Yet very few business owners and leaders think enough about operational capacity – until it gets them into trouble.

Do these common capacity problems sound familiar to you?

  • Your business has multiple capacity issues to manage, at the same time.
  • Your business depends on people, and you don’t know how to plan or measure their capacity.
  • Your business has too much capacity sometimes – but not enough at others.
  • Your business has abundant capacity overall, but suffers from bottlenecks.
  • You don’t know how to find your business’s sweet spot, where capacity is optimised.
  • Your business might plan for capacity, but doesn’t measure it in practice.

 

What Does Operational Capacity Mean in Your Business?

Many traditional businesses think about capacity in terms of production volumes and throughputs, eg how many units a canning line can process per hour. These capacities are often easier to plan or assess, because they can be counted as fixed units and easily compared to related business metrics, eg orders placed by customers.

Increasingly, however, businesses need to consider the capacity of other (frequently interrelated) processes, eg:

  • Trained staff available and rostered to run the canning line.
  • Space available to store unfilled and filled cans.
  • Loading bay space for trucks to deliver or collect inventories.
  • The capacity of our canning business’s sales team to take orders, and the procurement team to plan purchasing cycles.
  • Production capacity for the food, beverages or other goods that need canning.

 

How Do You Measure the Capacity of People ?

The Australian economy is now predominantly based on the production of services, not goods. And by their nature, people are highly variable, so two people working in the same business with apparently similar training and working the same hours might have quite different capacity, eg because of the different customers they might be dealing with.

For example, how might you plan for and compare the capacity of two waiters working in a cafe, when one of them is servicing outdoor tables farther from the kitchen?

In our experience, a subjective measure of people-based capacity is much better than nothing at all – and there are certainly practical and engaging ways they can be planned for and managed.

 

Does Your Business Have Overcapacity, Undercapacity, Or Both ?

One of the trickiest elements of any Strategic Plan for a business targeting growth is to make the right assumptions about what capacity levels to budget and hire or procure for.

Thinking about this in SOWaT terms, the costs of overcapacity tend to be internally driven Weaknesses, whereas the financial and opportunity costs of undercapacity tend to be externally facing Threats:

  • Overcapacity might mean that your business has premises that are too big, idle or underemployed staff, or production machinery that are not cost efficient. If your business has these problems you will probably be stressing your working capital (eg Accounts Payable and Cashflow) and maybe also have borrowed too much long term debt, or pumped in too much share capital.
  • Undercapacity typically means that you will not keep up with customer orders, at the required level of quality. Your customers will probably lose faith and move their business elsewhere, and you will probably also be stressing your staff to the point they may quit.

Good news: both overcapacity and undercapacity risks can be mitigated, especially in the medium to long term, if they are correctly anticipated, eg:

  • You may rely in part on contract labour or outsourced processes, when volumes are prone to fluctuations.
  • You might subcontract your underutilised production facilities to others with complementary needs, eg a craft brewer might find a boutique soft drink maker to use its canning lines, for a profitable fee.
  • You might provide incentives to customers to wait longer for their shipment, eg by offering free storage and shipping, while navigating a temporary production spike.

 

Does Your Business Have Bottlenecks ?

Very often, the points where business processes join together become single points of failure, or bottlenecks, when constraints overwhelm capacity that is otherwise abundant across a business. Business owners and leaders need to be especially vigilant about these connection risks, and ensure that their people on the shop floor work together to prevent and solve them.

When bottlenecks occur, standardised processes fail and quality standards slip.  Goods are shipped without time for inspections. Junior professionals do work that goes unchecked by their qualified supervisors.  Worst of all, accidents can occur, as stressed staff cut WHS corners to catch up.

So what should you do ?  We think that the best way to identify bottlenecks is to have honest conversations with your people – they will know, from the day to day problems they have to solve. And the best way to fix them is to invest in business process mapping and optimisation, so that you know what to change without causing new problems.

Finally, here is a classic television sitcom example of what can happen, if you don’t get on top of business capacity bottlenecks….

 

What Are Your Business Capacity Sweet Spots?

All machines tend to have production levels and frequencies where they work well, eg using the most efficient ratios of power to outputs, or where regular preventative maintenance will keep them running as designed for much longer.

Interestingly, people working in services businesses will also usually have a sweet spot, in terms of scheduled vs actual workloads. Too little work (or work that lacks positive variety) will bore most workers, and bored workers are usually unhappy, unproductive and inclined to leave. Consistently overworked people feel valuable in the short run, and may earn more material rewards, but over time they lose focus, become stressed and also tend to leave.  So we advise our services clients to target role productivity or utilisation levels for their people that:

  • Allow for annual leave and public holidays.
  • Free up time for training and development.
  • Provide opportunities for new challenges, eg through stretch assignments.

 

Sustainable Growth Requires Planning AND Checking Capacity

There is no point targeting growth for your business, if you are not also planning and assessing its capacity carefully. And don’t just set and forget – check your business’s actual capacity against what you planned from time to time, so that you plan even better next time, and ensure that your growth is genuinely sustainable.

Matt McDonald

Matt McDonald

Matt has worked as a CFO, Acting CEO and Head of Sales, HR and Risk for 30+ years.

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