Capacity Management

Capacity management is the process of ensuring that a business has the right amount of productive capacity to meet current and future demand. Getting this balance right is critical — too much capacity wastes resources, while too little means lost sales and dissatisfied customers.

Key Definition: Capacity management involves planning and controlling the level of productive capacity available so that a business can respond effectively and efficiently to changing levels of demand.

---

Understanding Capacity Utilisation

As covered in the previous lesson, capacity utilisation measures the percentage of maximum output that a business is actually achieving:

Capacity Utilisation = (Actual Output ÷ Maximum Possible Output) × 100

The challenge for operations managers is that demand fluctuates — seasonally, cyclically, and unpredictably — while capacity tends to be relatively fixed in the short term. A hotel in a seaside town might experience 95% occupancy in August but only 30% in January. A chocolate manufacturer faces enormous demand spikes before Christmas and Easter but much lower demand at other times.

---

Problems of Under-Utilisation

When capacity utilisation is low (typically below 70–75%), the business faces several problems: