Capacity Planning Types: Lead, Lag & Average Strategies

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  • 0:00 Capacity Planning Defined
  • 1:40 Lead Strategy
  • 2:16 Lag Strategy
  • 2:55 Average Strategy
  • 3:46 Lesson Summary
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Lesson Transcript
Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

A key strategic decision businesses must make concerns capacity. In this lesson, you will about learn capacity planning and three different capacity strategies that can be employed by businesses to accomplish their objectives.

Capacity Planning Defined

Meet Casey. She's the CEO of a manufacturing firm that makes electronic components for computers, smartphones, and other consumer electronic devices. Her company is doing quite well and is in the process of developing a long-term strategic plan, which includes capacity planning.

Capacity planning is the process used by a business to determine the resources it will acquire to meet the demand for its products or services. The more capacity a company has, the more output in the form of goods and services it can produce to satisfy demand. Casey needs to figure out much raw materials, components, labor, and investment in equipment and facilities her company needs to acquire over the next couple of years to meet future demand for her company's products.

Planning for capacity is important for many reasons. The level of capacity Casey's company has affects its ability to be responsive to its customers and its ability to compete with its competition. If there's a lack of capacity, customer needs are not served as quickly, and these customers may be lost to competition. On the other hand, capacity is about resources, and resources cost money. Excess capacity means company money is being spent inefficiently. It could have been invested elsewhere for a profit, such as a new business venture or just a simple interest bearing savings account.

Casey can employ different strategies in her capacity planning. Let's take a look at three common approaches: lead strategy, lag strategy, and average strategy.

Lead Strategy

Casey's company can employ a lead strategy for its capacity planning, which involves increasing the company's capacity in anticipation of an increase in demand for its products and services. This is an aggressive strategy that seeks to either create new customers or take existing customers away from the competition by having the capacity to immediately respond to customers' needs where the competition's present capacity is unable to do so. The strategy is riskier than the other strategies we will be discussing because it is planning for demand that currently does not exist and may not materialize.

Lag Strategy

While a lead strategy is aggressive, a lag strategy is conservative in nature. If Casey's company employs a lag strategy, it will only increase capacity when there is an actual increase in demand for her company's products and services. A lag strategy helps to ensure that a company obtains the best return on its investment as possible by not creating wasteful excess capacity. However, there is a risk: if there's an increase in demand that Casey's company can't immediately meet, it risks losing not only potential customers but current customers to its competitors that can meet the demand.

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Additional Activities

Additional Questions

  1. What is capacity planning? How does this planning relate to a company's efficiency in providing goods and services for their customers?
  2. What is a lead strategy? In addition to defining this strategy, your answer should also discuss the goal of the strategy.
  3. Why is a lead strategy especially risky? Specifically, what are the risks if this strategy does not have the intended consequences that it is aimed to generate?
  4. Think of a type of business that could benefit from a lead strategy. Why would this business be able to benefit from a lead strategy?
  5. What is a lag strategy?
  6. What is the primary benefit of a lag strategy? What risk does a company take by using a lag strategy?
  7. Think of a type of business that could benefit from a lag strategy. Why would this business be a good candidate for a lag strategy?
  8. What is an average strategy? Why is this type of strategy likely the most widely-used strategy in business?
  9. How does an average strategy reduce the risks that the firm must take in applying a lead strategy or a lag strategy?
  10. Think of a type of business that likely currently uses an average strategy? Why do you believe this business uses this strategy?
  11. Think of a specific company that has recently and successfully employed a lead strategy? Why do you believe this business was successful using this strategy? (Note it may be helpful to do some online research in order to answer this question.)

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