How to balance the scales of demand and capacity

Financial Management
Saturday 15th April 2023

How to balance the scales of demand and capacity

Financial Management
Saturday 15th April 2023
Written by Steve Roxby

The relationship between demand and capacity is a tricky balancing act. 

However, achieving capacity and demand equilibrium is critical for success, regardless of your size or industry.

Here we explore the concepts of capacity and demand management and provide practical tips and strategies to help you achieve balance between the two. 

Understanding the fluctuations 

As businesses, we operate in a dynamic environment where demand for products and services can fluctuate significantly over time. 

These fluctuations can be driven by various factors, such as changes in consumer behaviour, economic conditions, and market competition. 

When capacity cannot meet demand, you’ll have a shortage of goods or services and won’t be able to meet your customers' needs. This can result in lost sales and reduced satisfaction. 

When capacity outstrips demand, it can lead to wasted resources, increased costs and lower profitability.  

To effectively ride these fluctuations and achieve balance between capacity and demand, you need to focus on two key areas: demand management and capacity management.

What is demand management? And how to implement it

Demand management involves understanding your customers’ needs and wants (assessing) and developing strategies to create and control demand for your products and/or services (planning).

Here are some practical actions for effective demand management: 

  • Look at your current workload – Analysing your sales data can be a good starting point but not a comprehensive indicator of demand on its own. If you have a consistently high workload, demand could be high. If it’s low, vice versa. If it’s inconsistent, you could be subject to fluctuations. 
  • Look at your pipeline (short to medium term) – This can provide valuable insight into future demand for your product and/or service.  If your pipeline is large and growing, it may indicate that demand is strong and you have a healthy sales funnel. If it’s small or stagnant, it may suggest your sales funnel is weak, and you need to work on lead generation and acquisition. 
  • Conduct market research – Conducting market research can help you gain insights into your target customers' needs and preferences. Use surveys, focus groups, and online research tools, or simply speak to your clients to get a feel for what their demand might be. 
  • Monitor industry trends – What industry are you in? What are the opportunities and threats? To answer these questions, keep up-to-date with industry trends by reading trade publications, attending conferences, and following experts. Understanding trends can help you to anticipate changes in demand and stay ahead of the competition.
  • Use forecasting tools – Use forecasting tools to predict future demand based on historical data, market trends, and other factors. This can help you better plan your production, inventory, and staffing levels to meet customer needs.
  • Develop a marketing strategy – This involves understanding your target customers (prospects and existing) and creating messaging and promotions that resonate with them. Determine which channels will be most effective, for example, social media, paid advertising, emails, and promotional offers, and ensure you measure results. 

What is capacity management? And how to implement it

Capacity management involves understanding the resources required to produce and deliver your products and services and ensuring these resources are available and utilised effectively.

Here are some practical actions for effective capacity management: 

  • Conduct a capacity analysis – What’s your current capacity based on existing resources, and is it efficient? Analysing your current and future capacity needs can help identify potential gaps and areas for improvement. For example, look at the number of people x productive % x charge rate, and assess what variations may increase or decrease this. 
  • Assess and optimise your supply chains – Can you get the products you need? What is the capacity of your suppliers to meet your production needs? To figure this out, you should evaluate your suppliers' production facilities, equipment, and staffing levels. Look for any potential bottlenecks or constraints that could impact their ability to meet your needs. Plus, work on strengthening relationships so you can get the necessary resources when needed. 
  • Look at labour availability – This involves evaluating the availability of workers both internally and in the market with the required skills and experience to meet your business needs. In today’s tight market, many industries are experiencing a shortage of quality candidates, so your planning needs to account for this. 
  • Reduce or increase staff – If you have more capacity than demand, you may need to decrease team numbers or hours or have staff take leave. If you have less capacity than you need, look at hiring more staff, offering increased hours or engaging in subcontracting or labour hire. If capacity is stretched, reconsider your current work or the clients you’re working on.
  • Invest in technology and automation – Leveraging technology and automation can help you increase efficiency and reduce costs by minimising manual processes.
  • Develop contingency plans – Developing contingency plans for unexpected events such as equipment breakdowns or supply chain disruptions can help mitigate the impact on your operations.

Additional advice for getting the balance right 

To achieve capacity and demand equilibrium, it's important to take a holistic approach that considers all aspects of your business, from production and supply chain management to marketing and workforce development. 

We recommend continual planning of your workload, including looking at projected sales and resource requirements. 

If demand is high, you may require funding to increase your material and labour costs. So make sure you evaluate your finance options, build relationships with lenders and manage your cash flow effectively. 

Financial reporting systems are a great way to monitor team performance and identify enhancements to increase capacity. 

In addition, ongoing communication with your team, clients and suppliers is crucial to getting the balance right. It can improve coordination and collaboration, help you develop more accurate forecasts and ensure customer satisfaction and loyalty. 

Agility and adaptability in response to changing market conditions and customer needs is also vital.  

Assessing and planning are key to success

The balancing act between demand and capacity is certainly delicate. But by following our advice and effectively assessing and planning for demand and capacity, you can build a strong, sustainable business for long-term success. 

If you need support and advice on achieving balance between demand and capacity in your business, reach out to your Maxim advisor or get in touch with our team.