Capacity Constraints: The New Norm?
By Laurie Harbour, Harbour Results, Inc.
Capacity constraints are one of today’s biggest challenges for any supplier. Although there is still a lot of uncertainty in the economy, customers are demanding higher and higher volumes, while also launching new products. Plastics processors are working long hours, trying to hire new people and contemplating new equipment with hesitancy. No one knows if this strong demand is real and sustainable or if it is a temporary situation. Nevertheless, it is a very real problem.
In manufacturing companies, the owners traditionally created a strategic plan that called for a certain amount of volume. Then, that strategy was given to the sales team with a request for a sales plan to achieve the strategy. Operations was asked to react to that sales plan in a 12-month window, and Production was forced to figure out how to manage it daily. This approach was very linear and did not allow for – or require – much interaction or communication in order to successfully execute the strategy.
With the strong increase in demand that customers are facing, however, many companies’ operations are hurting in performance because they cannot react quickly enough to the demand. Quality is impacted, overtime is high and labor is getting burned out.
The best companies today are working with a much more successful model. These companies are linking the operations manager and the sales manager at the hip, asking them to plan together for the demand coming in the door and the supply going out. This involves working together 12 to 24 months out to gather data on potential customer demand. Once demand has been forecasted, the following factors need to be assessed:
- production schedule
- capital required
- people needed to produce parts (and when those people are required)
- the appropriate amount of inventory to keep
- and all the other factors necessary for the successful execution of production when it comes in the door.
Most sales managers will tell Harbour Results that there is no way to predict demand from their customers, and that Operations has to manage the volume as it arrives. We contend that if the data is thoroughly analyzed, customer demand can be more easily predicted than imagined. Sales professionals tend to analyze sales data only, but if the patterns of sales, production volumes and market trends over a longer time horizon are assessed, the patterns will emerge.
Sales planning is more than just developing target markets. There are four critical components to developing a solid demand forecast:
- First, talk to customers and develop a set of questions for them that will get more information about their demand patterns.
- Second, gather outside forecast data. Regardless of the industry, there usually is an outside source of data about the industry and potential demand. Read as much as possible in industry papers, and know the industry in order to plan for the products that will be supported, as well as their volumes.
- Third, review historical customer demand data for the last five years. Study the patterns and work internally to analyze the data among the team. Leverage that internal knowledge to build a solid understanding of demand.
- Lastly, study and review economic conditions at a macro level and – more specifically – within the industry. Too many companies focus on sales and talking to their customers, but are not getting educated about the industry around them and the economy that supports it.
Once this work is done by the sales and operations team, then the organization can develop a solid capacity plan and lay in the forecasted sales. This information will lead the organization to a detailed capital plan of what to purchase and when. It will identify when people are required to be added to the organization, and what type of capability will be needed. This information will drive the 12- to 24-month operating plan. This should be reviewed weekly and monthly and adjusted as appropriate. It won’t be perfect, but if it is 80 percent directionally correct, then the organization will be further ahead than the competition.
Ask these questions: Is the capacity of the organization known? Where are the bottlenecks – people, equipment, physical space, auxiliary equipment or others? Is internal data resolution adequate to identify constraints? As these types of questions are pondered and the need to match demand to supply adds pressures to the organization, be mindful that a relatively high percentage of companies – in excess of 40 percent, based on our benchmarking – do not know their true capacity constraints.
Combining operational and financial advisory expertise with industry analysis and thought leadership, Harbour Results delivers results that impact the bottom line. The company specializes in manufacturing, production operations and asset intensive industries, as well as a number of manufacturing processes, including stamping, tooling, precision machining and plastics.