Capacity planning is the process of determining the production capacity needed by an organisation to meet changing demands for its products. In the context of capacity planning, "capacity" is the maximum amount of work that an organisation is capable of completing in a given period of time.

A discrepancy between the capacity of an organisation and the demands of its customers results in an inefficiency, either in under-utilised resources or unfulfilled customers. The goal of capacity planning is to minimise this discrepancy. Demand for an organisation's capacity varies based on changes in production output, such as increasing or decreasing the production quantity of an existing product, or producing new products. Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities.

Capacity is calculated: (number of machines or workers) x (number of shifts) x (utilisation) x (efficiency).

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy:

Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful.

Lag strategy refers to adding capacity only after the organisation is running at full capacity or beyond due to increase in demand. This is a more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers.

Match strategy (also known as the tracking strategy) is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.

Edit