Capacity planning is not the most glamourous part of logistics, but it’s becoming an increasingly critical component for businesses looking to compete in a landscape filled with Amazon’s and Alibaba’s. There is some good news though. We don’t all need gigantic, technologically leading distribution centres to be at the head of the game like some of the world's most recognisable brands have. In steps capacity planning.
Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products, and is a sure-fire way for small business to reduce costs of distribution and holding deadstock. In fact, putting a bit of care and thought into your warehouses capacity can reduce costs throughout the year in a variety of areas. In this post, we look at how to find the sweet-spot when it comes to managing the inventory and capacity of your warehouse.
The Goldilocks principle
When looking to optimise throughput, it might be handy to consider the well-known analogy first introduced by the children’s story The Three Bears. Unbeknownst to the British author and poet, Robert Southey, he created an analogy that has lasted over 100 years to refer to things as being neither too simple, nor complex, too easy or too hard, and in the case of capacity planning, demand neither too high or too low.
You’ll want to ensure that your warehouse and distribution centre has the capacity to supply the right amount of product, at the right place, at the right time. When it comes to stock itself, it is a thin line between overstocking and understocking, but if you’re keeping a lot of deadstock that doesn’t sell, it’s going to take up a lot of floor space in your warehouse that could be used for products with higher throughput, while also running up an inventory management and storage bill that you're most likely better without.
The Goldilocks principle is a handy base level guide when it comes to capacity planning, but you’ll also need to take into consideration your own unique demand forecasts, and make sure you warehouse and distribution centre can still function in times of high demand. Make sure you tap into historical sales data to forecast future demand, trends, seasonality and unpredictable random events.
Warehouse capacity planning might seem daunting at first, but if you make sure it is intrinsically tied to your business goals and objectives, it will prove to be a useful and lucrative tool. To set your planning on the right path, your capacity forecasts should be married to four critical areas of your business. They are:
Start by averaging out your sales by each month to get a good overview of the ebbs and flows throughout the year.
Take note of all the market fluctuations month to month and with the season, this will give you a sturdy understanding of how product orders and production costs will change throughout the year.
Understand everything from inventory lead times, your sales cycle, potential surges in demand and your production or product minimums and maximums,
You need to make sure your overall goals and constraints are factored in when planning the capacity of your warehouse. Yes, all businesses would love to set up a distribution centre as complex and successful as Amazon, but the reality is not all businesses require it.
Once you combine the fluctuations in your market, the unpredictability of your demand, how you’re producing/acquiring products, it might seem like a big, complicated mess that can’t be deciphered. But there is good news. After all this, you should have figured out how much product you generally sell and this will shine light on the requirements for your distribution warehouse capacity.
Still not convinced? It's understandable. It might seem like a lot of work and analysis to undertake when it's already time-consuming to keep a warehouse going. The great thing about doing this initial grunt-work is that it will increase your throughput while weeding out inefficiencies. Read more about it below.
How optimising capacity increases throughput
If you were feeling overwhelmed by the process of figuring out your capacity, the hard work does pay off. We outlined just a few of the benefits below:
Reduces the cost of your fulfilment
Making sure the capacity of your warehouse reaches optimum efficiency reduces the amount of hands touching the product at each stage of fulfilment. This reduces the overall cost of each item being shipped as well as reducing overall costs. If you read our case study on Ikea’s self-service supply chain, then you should know all about cost-per-touch and how reducing the amount of people touching products in your order fulfilment process drastically reduces costs of distribution.
Minimise picking times
Once you’ve effectively mapped out your warehouse or distribution centre floor, you should have a clear idea of the most efficient way to pick and pack. Optimally, you should have horizontal conveyer belts to transfer items along the floor, allowing you to move as much product at one time as possible. Pro tip: to make sure you avoid headaches in distribution centres with thousands of SKUs, consider aisle mapping: a simple process that ensures the correct item is assigned a permanent location.
Maximise and optimise available space
Rather than expanding the footprint of your warehouse, optimising the capacity of it ensures that every centimetre has a purpose. If you experience rapid growth, moving to a bigger warehouse will only increase costs. Manage growth efficiently by making better use of vertical space. Taller storage units and the right equipment to pick and store materials that meet your capacity are a cheaper alternative to getting a bigger warehouse.
Capacity planning does take a bit of work, but businesses today that aren't running a lean ship are haemorrhaging needles cash in storage and deadstock instead of gaining a clearer picture of their warehouses capacity and what their business is capable delivering. Are there any other benefits to capacity planning? Let us know in the comments below and we can feature it in part two of this blog post.