Capacity is the ability of resources to produce output over time.
Capacity planning is "the process of determining the production capacity needed by an organization to meet changing demand for its products" (Wikipedia 2010).
- Lead strategy is adding capacity in anticipation of an increase in demand. The benefit of this approach is that capacity is available so that the increase in demand can be met. The drawback is that if the forecasted increase in demand does not materialize, the firm is left with excess capacity and may have to make difficult decisions in response.
- Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand. The benefit of this approach is that capacity is not added until the firm is sure of the increase in demand. Capacity utilization rates will be high. The drawback is that the firm may place undue stress on its mechanical, human, and material resources leading to problems. It may also lose sales if it cannot meet demand with overtime and short-term methods while capacity is added.
- Match strategy is adding capacity in small amounts in response to changing demand in the market. The benefit of this approach is that capacity is close to the actual demand. The drawback is that either small changes to capacity may not be possible, or that the constant changes harm the organization (especially if the small downward changes result in frequent layoffs).