Ruthless Capacity Management

Automotive companies typically shut down plants during summer time for annual maintenance and model-year changeover activities. This year, GM decided not to take time off because it realized that demand was picking up and it did not want dealers to be short on supply. As a result, they sold an extra 60,000 cars this summer. 

The key question here is how did GM know that it had just enough machines, people, hours, etc. to be able to meet the rising demand? It was possible because GM understood how much manufacturing capacity it had and how much it was originally planning to idle. It knew exactly what resources were at hand and available to commit to the demand spike. Of course, all this is post-bankruptcy where GM has been able to shed/write-off its excessive, undesired capacity. But you’ve got to give them credit for selling more cars than planned as a result of what people are starting to call “ruthless capacity management”. 

A new body of research (from the likes of Drucker, Porter, Hamel, Charan) is pointing to effective capacity management as a key ingredient for long term business success. Capacity comes in all shapes – people, machines, money, space, etc. Essentially, every business asset you have has a finite capacity. Your ability to deliver to the market needs is constrained by this capacity. You just cannot keep promising things to people because you may not have the capacity to meet their demand. Further, the economic downturn and the resulting loss of demand appetite by our customers makes it ever more tricky to forecast what the demand maybe in the next week,  next month, or next quarter. Good luck if you are going out any further than that! Since you really do not have a whole lot of control on this beast called demand, you better get sharp on managing your capacity. Once you improve your capacity capabilities and insights, you improve your ability to be able to move assets around when you get hit by a rise or drop on demand. And then you start trending towards the “ruthless” state of mind. It’s not just about being lean, but more importantly about being nimble and quick.

Managing capacity is easier said than done. Try answering the following questions to gauge how well you are managing your organization’s capacity –

1. Do I know what all of my assets are?
2. Do I have my assets well quantified (i.e. capacity) and described?
3. Do I know how my capacity is being utilized? How often is this utilization validated?
4. Is my organizatioal capacity being utilized on things that are important?
5. What are my capacity bottlenecks or chokepoints?
6. Which parts of my assets are fungible and which are not?

Understanding capacity is like understanding your strengths. It provides you with a competitive advantage and shows you whether your precious dollars are invested in the right assets. Our customers need us to move fast and will not tell us until the very last minute, what they want. The only way we can keep up with them is by managing our capacity like we manage our personal bank balance.

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