Getting your capacity right means meeting the needs of your customers without wasting resources. “Capacity” refers to the amount of business you can do over a set period of time. For example, the number of products you can make in a month, or the number of customers you can serve in an hour.

Capacity is not the same as capability. Capability means whether you can do something, whereas capacity is about how much of that thing you can do. For example, you might be capable of making the best coffee in town, but perhaps you need to increase your capacity so you can serve more of those coffees at peak times.

Ideally, you want to achieve optimum capacity (happy customers, minimal waste). You want to avoid constrained capacity (bottlenecks, lost sales opportunities) or excess capacity (wasting money and resources). Sometimes you may need to adjust your capacity to meet changing customer demand. And sometimes you may need flexible capacity when demand is unpredictable.

The right capacity helps many aspects of your business

Getting your capacity right can help you in several ways.

• Sales — you’re ready for your customers whenever they’re ready to buy your products or services
• Costs — you avoid spending money on resources you don’t need
• Cash flow — you don’t tie up money in excess stock if you don’t need to
• Quality — you can meet your customers’ needs without compromising on the things they find valuable
• Speed of service — your customers don’t have to wait
• Reliability — you don’t have to turn customers away or disappoint them
• Flexibility — you’re ready to respond to sudden spikes in demand if necessary

Customer demand should drive your capacity

Ideally, your capacity should match customer demand most of the time. Of course, customer demand doesn’t stay constant. Depending on what type of business you run, demand can change by the hour, day, week, month, season, or year. For example, restaurants get busiest at mealtimes, bars get busiest on the weekends, accountancy firms get busiest at the end of the tax year, and toy makers get busiest at Christmas.

To optimise your capacity, you need to understand customer demand and predict when and why it might change. You can then plan your capacity over the long term, as well in the short term to deal with specific peaks or troughs. If customer demand is changing rapidly or is unpredictable, you may need to either chase demand or stay flexible.

To plan your capacity, you first need to measure demand. You may already have a good feel for how much demand exists based on your busy and quiet times, but measuring more carefully will give you better insights.

Start by choosing an aspect of your business that indicates how much demand there is — for example, number of items you sell, number of customers you serve, or number of work requests you receive. Then choose the most logical period of time to measure — for example, a standard work week, the busiest period of each day, or your busiest season.

Next, match up these two things. For example:

• number of items you sell each week
• number of customers you serve between 8am and 10am each day
• number of work requests you receive in June, July, and August.

Analyse your data — both big picture and detail

Now look at historical data such as sales figures or bank transactions. How much business are you doing in the time period you’re looking at? Can you spot any trends? For example, you might usually sell a certain number of items a week, but your sales figures show an increase in March and April that you hadn’t noticed before.

Looking across 12 months helps you spot longer-term trends, while looking at shorter time periods helps you see the detail of seasonal events, such as summer or Christmas.

Ask your customers and your suppliers

Gathering data and opinions from people involved with your business gives you great insights. Customers and suppliers can tell you all sorts of things you can’t see yourself or haven’t taken into account.

You can gather your customers’ opinions in a number of ways. You could set up an online survey, hold a focus group, or ask for feedback at your point of sale (eg, on an iPad or on paper). Ask customers what they like and what they don’t like, and what you could change to serve them better. Consider offering a small reward or a prize draw for taking part.

Ask your suppliers for their thoughts on what’s happening in your industry. Have they spotted any trends you should be aware of? Have they noticed anything that similar businesses are doing that you should also be doing?

Demand doesn’t always stay constant. As well as measuring current demand, you should consider possible increases or decreases in demand.

Ask yourself:

• Is your business growing?
• Is your customer base expanding?
• Are new competitors entering the market?

Think about the wide range of factors that might affect demand in future.

• Political factors — eg, a change of government might affect consumer confidence
• Economic factors — eg, the changing price of ingredients might affect how much you can charge for your products
• Social factors — eg, your core customers might be growing older and having children
• Behavioural factors — eg, your customers might want more eco-friendly products or packaging
• Environmental and climactic factors — eg, warmer or colder weather might affect what people will and won’t buy
• Festival or cultural factors — eg, increasing interest in certain celebrations, such as Matariki, might open up new sales opportunities
• Technological factors — eg, creating a new website, app, or social media channel might make your products or services easier to access
• Legal factors — eg, new regulations might bring in certification for your product, meaning customers can easily see your superior quality

Think about your customers and competitors

Use the following tool to think about what’s important to your customers and how you match up to your competitors. Could you increase demand by focusing more on the things your customers value most? Should you expect a change in demand because of what your competitors are doing?

How you stand out in the marketplace

To measure capacity, you can focus on either inputs or outputs. Inputs are the resources you put into your business, such as staff hours and raw materials. Outputs are the products or services you provide to your customers.

If you just make a single, standard product, it’s relatively easy to measure your capacity for that output (eg, the maximum amount you can make each week). But the greater the range and variation of your outputs, the harder it becomes to measure capacity — then it might be better to focus on inputs (eg, the maximum number of hours your staff are available each week to make products or provide services).

For example, a plumbing company may find it hard to measure capacity by counting the number of jobs it can do each month (outputs), as each job is a different size. Some jobs take an hour whereas others take days or weeks. It’s much easier to measure capacity as inputs, such as the maximum hours available for plumbing each week.

Measure the inputs or outputs that make the most sense for your business

Once you’ve measured demand and capacity, it’s time to make changes. Remember, you’re aiming for a balance between making the most of sales opportunities, keeping your customers happy, and keeping costs down. How are you doing so far? Are you always under pressure to serve your customers? Or could you easily do more business than you’re currently doing? What about if demand changes in future?

Three approaches to capacity are:

• keeping capacity constant
• changing capacity to fit demand
• influencing demand to fit capacity.

Most businesses adopt a mixture of all three methods, but one method might work better for you than others.

Every business, product or service has a different production profile. Each differs in terms of:

• volume (how much is produced)
• variety (how many different things or variations of the same thing are produced)
• variation (whether business is steady, or has peaks and troughs)
• visibility (how much contact there is with customers).

Thinking about your production profile, and your competitors’, helps you understand where you have an advantage in the marketplace.

Use this tool to compare the production profile of a business, product or service against its competitors. You’ll reflect on volume, variety, variation, and visibility.

Based on your position, we’ll give you some tips on how to strengthen your point of difference — so you can compete better.

Some businesses benefit from flexible capacity — the ability to quickly respond to changing or unpredictable demand. For example, you might need to quickly and easily:

• change the volume of what you make or offer
• change the range of things you make or offer
• change from making or offering one thing to making or offering another.

It’s important to recognise that flexibility can be costly. Doing one thing and doing it well tends to cost less than trying to do a wider range of things or frequently changing what you do. Decide whether flexibility is really important for your business before investing in it.

Define the type of flexibility your business needs

Whether you need flexibility, and what type you might need, depends on what your customers want and what your competitors are doing. For example, you might need to respond to customer orders quickly, no matter when they come in. Or you might want to be able to quickly increase or vary what you’re doing, to create a point of difference in an ever-changing market.

Update measurements for your new processes

If you decide to become more flexible, you need to set benchmark measures before you change anything so you can measure any improvements. Flexibility can be costly and disruptive, so you want to make sure that you’re benefiting from any new processes.