What is Capacity in Supply Chain Management?

Supply Chain Management
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As a general business term, capacity in supply chain management refers to an entity’s capability to generate output over a predetermined period. Some businesses, particularly those that don’t have a supply chain optimization strategy, will often ignore their supply chain capacity, thinking that they are already operating at their maximum level. Unfortunately, however, many of them are not. 

Like with many aspects of supply chain execution, capacity management shouldn’t be taken individually but with the other elements that provide business availability. These three elements include capacity, inventory, and lead times. Business leaders will also need to consider where problems may arise within different departments. These will include the following:

  • Sales – Whenever promised delivery dates cannot be met. 
  • Finance – When financial officers require a reduction in finished goods stock without actually determining what impact this will have on deliveries and overall customer service. 
  • Operations Planning – When it comes to operations planning and control, some operations managers make the mistake of reducing their raw material and component inventory levels without considering its impact on the manufacturer’s process and overall capacity.
  • Procurement – Whenever the company accepts a lead time extension from a supplier in exchange for a reduction in the item price, without considering the impact on production capacity and inventory levels. 

Measuring Capacity in Supply Chain Management

When it comes to measuring capacity to meet their goals, businesses can either use the input, output, or a combination of the two. For instance, a recycling business will calculate its capacity by looking at the total amount of material they can clear from their inbound trailers – the input. On the other hand, a textile business will measure its capacity based on the total amount of yarn they produce – the output.

In addition, companies will use two measures of capacity; theoretical and rated. The theoretical capacity takes into account the maximum capacity during output but doesn’t consider any other variables such as downtime. Rated capacity, however, is the output capacity that is based on a long-term analysis of the actual capacity. The rated capacity is a more realistic measurement that’s based on actual measurements and not the maximum capacity possible. 

Also, supply chain software such as enterprise resource planning (ERP), warehouse management systems (WMS), and even transportation management software (TMS) will calculate throughput and other supply chain metrics by using predictive analytic formulas that are dependent on the capacity to meet their goals. 

The Capacity Plan

Companies can also identify the potential capacity availability at all supply chain network levels with a capacity plan

  • Supplier Capacity – Including tier 3 and 4 suppliers and supply markets can affect the capability to import and/or produce items. 
  • Production Capacity – Different variables and constraints here can affect both the business and its own contractors during the production process. 
  • Transport Capacity – Be it during transport or at cargo handling facilities, inefficiencies can influence on-time deliveries and overall service level performance.
  • Distribution Capacity – Both storage and throughput can impact the facility’s or 3PL’s costs and on-time deliveries. 

Different Supply Chain Capacity Strategies

When supply chain optimization, manufacturing, and production management are implemented within an organization, three capacity planning and control strategies can be applied. 

The Lead Strategy

As its name would imply, the lead strategy adds capacity before the demand occurs. Many companies prefer the lead strategy as it allows them to increase production during periods of low demand. If an issue occurs during the ramp-up in the manufacturer’s process, production management can be resolved before the demand occurs. Not only does it help minimize risk, but this strategy can also help maintain customer satisfaction by not failing to meet delivery dates due to a lack of capacity. 

The lead strategy can also give companies a competitive advantage in specific situations. For instance, if a toy company considers that a certain item will be popular during the holiday season, it will increase its capacity before the anticipated demand. In doing so, the product will be already in stock while other manufacturers will have to catch up. Nevertheless, the lead strategy isn’t without risk. Suppose their demand planning doesn’t match with reality and will not materialize. In that case, the company can find itself with too much-unwanted inventory after having incurred the extra costs of ramping up capacity. 

The Lag Strategy

The lag strategy is the opposite of the lead capacity strategy mentioned above. With it, a company will only ramp up capacity after the demand has occurred. While success is not always guaranteed, the lag strategy does hold a couple of advantages. For starters, it helps reduce some risks. By not investing during periods of lesser demand and delaying significant capital expenditure, the organization will be able to maintain a more stable relationship with its investors. Secondly, the organization will continue to be more profitable than those that have invested in increasing capacity. There is, of course, a serious downside to the lag strategy. Namely, there will be a period where the product will be unavailable until capacity can finally catch up, creating issues for customer satisfaction, such as longer delivery windows.

The Match Strategy

Other business leaders will choose to use a strategy that goes between lead and lag strategies. Known as the match strategy, this method tries to increase capacity in small increments, looking to match the demand increase. By using this strategy, businesses will monitor the market for demand increases and decrease on a continuous basis. While this method looks to minimize both over-capacity and under-capacity, companies using this strategy will almost always find themselves in either situation at different points in time. 

Supply Chain Capacity Can Change

To optimize your supply chain capabilities, you will need to provide your customers with what they want, and when they want it while minimizing costs as much as possible. To achieve this, you will also need to know how to take advantage of your manufacturing and production capacity. However, the rate at which workflows within the organization can influence the capacity. Several factors can influence this, such as:

  • The rate of getting new orders. 
  • The rate at which order forecasts materialize. 
  • Changes in order priority. 
  • The number of canceled orders. 

The actual supply chain capacity can be affected by variability, interrelationships between the elements, and codependencies. Also, supply chain capacity can also be subject to change due to shifts in the transport mode and product mix, production process improvements, equipment, and labor skills. Even at the operational level, factors such as skill shortages, quality issues, unreliable equipment, lack of staff training, or inconsistencies between outputs from production planning and production scheduling can also affect capacity. 

It’s also important to keep in mind that the capacity tends to reduce when production and delivery delays occur. This can be the result of machine breakdowns, long changeovers, and employee absence. To increase capacity under these circumstances, some operations managers will include overtime work, subcontracting, or production schedules to split orders into smaller batches. If possible, routing manufacturing can also be used to circumvent any existing bottlenecks. 

How 3PLs Can Help With Capacity in Supply Chain Management

With increasing regulations, fewer driving hours, and an understaffed transportation industry, the truck capacity shortage has been negatively affecting businesses of all sizes and across industries. Almost every industry relies on trucking, in one form or another, to keep goods flowing on time, in good condition, and within a realistic budget. And while there is no ideal solution that can solve all of the issues or all of the pain points resulting from this shortage, one way of taking some pressure off is to leverage a partnership with a third-party logistics (3PL) provider

There are several ways a 3PL can help optimize your supply chain’s capacity. This will include some of the following: 

  • Getting access to an extensive carrier network – Professional 3PLs will have robust carrier administrative processes, back-office support teams, and load matching services that will allow them to vet carriers faster and more effectively. 
  • Cost control management – By having access to many carriers on long-term rate agreements, 3PLs will also look to purchase freight in the spot market. Likewise, higher freight volumes will also give 3PLs greater leverage over carriers, meaning that they can find backhauls, which will result in lower overall costs for shippers.  
  • Increased logistics optimization – Professional and experienced 3PLs have either built or have invested in supply chain software such as a Transportation Management System (TMS). The TMS will help the 3PL analyze shipping patterns, increase supply chain visibility, and provide improvement recommendations. These systems will include carrier integration for load tendering, rate confirmation, and track and trace options. In addition, 3PLs will also have access to load boards and freight marketplaces, helping them connect with shippers and carriers. 

Besides helping alleviate management issues related to supply chain capacity, 3PLs can also provide other benefits such as lower load management costs, better inventory and warehouse management, and increased supply chain visibility. Large 3PLs will also provide international freight forwarding, warehousing, and customized distribution solutions. If you need help optimizing and managing your supply chain capacity, Logistics Titans is here to help. Contact us today and enhance your supply chain execution!

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