What is production & capacity planning

Production and capacity planning ensures you can meet customer demand while making the best use of your resources - labor, machines, and materials, considering the different constraints. 

When this planning is not accurate or not taking into account last-minute changes, you’ll run into issues like production bottlenecks, missed delivery deadlines, and ultimately unhappy customers. Overestimating capacity means idle machines, wasted labor hours, and extra costs you shouldn't have incurred.  

This process of production & capacity planning works on multiple time horizons. It starts with long-term decisions about overall production targets and resource needs and ends with detailed task schedules for the factory floor. At every stage, you’ll align production goals with the practical realities of labor availability, machine capacity, material stock, each stage with a different level of detail of information. 

Where does production and capacity planning fit? 

These planning steps don’t stand alone. They connect the upstream steps (like demand and inventory planning) with the actual execution and monitoring on the manufacturing floor: 

• Typical upstream planning steps before production planning: inputs like demand forecasts, sales and operations plans (S&OP), and inventory policies set the stage. They tell you what needs to be made, when, and in what quantities. 

• Typical downstream steps that happen after the production planning: outputs like shop floor schedules and real-time execution hinge on the production plans.  

The four levels of production and capacity planning 

Production and capacity planning can be split into 4 key levels (mostly in accordance with APICS/CPIM), each having a different level of detail and therefore serving a different purpose with a specific time horizon:

3 higher levels of production planning from Introduction to Materials Management

1. High-level/aggregate production plan with a resource plan 

Sets the long-term goals for what needs to be produced over the next 6–24 months (the exact horizon depends on how well upfront you get customer orders).  

Typical questions to be answered at this stage: 

• How much total production is needed to meet the estimated demand or the budget/sales forecast? 
• Do we have enough capacity (machines, labor, materials) to hit our targets for each major product group (not considering individual products yet) 

Example: A company producing air conditioners might plan for extra capacity for summer demand spikes, ensuring machines and staff are available well in advance. 

2. Master production schedule (MPS) with rough-cut capacity plan (RCCP) 

Breaks down the high-level plan into schedules for specific products, unlike the previous plan. This is about deciding which items to produce, when, and in what quantities over the next 3–12 months. 

Typical questions to be answered here: 

• Which products need to be produced each week? This is not about product groups but individual SKUs. 
• Are the major resources, like key machines or work centers, sufficient to meet this plan? 

Example: The air conditioners company needs to plan which specific models need to be produced on a weekly basis, and check whether the individual factories/work stations can meet these targets.  

3. Material requirements plan (MRP) with capacity requirements plan (CRP) 

Focuses on which materials and resources are needed for production over the next 1–3 months. This ensures everything is in place to execute the MPS. 

Questions answered: 

• Do we have enough raw materials (e.g., steel, plastic) to meet production schedules? 
• Which parts or subcomponents need to be produced before the finished goods can be manufactured? 

Example: Ensuring there’s enough aluminum in stock for an upcoming production run while checking machine availability. 

4. Detailed production schedule with finite capacity schedule (FCS) 

Gets into the day-to-day details of production. This is about sequencing the tasks to manufacture the products: assigning jobs to specific machines and operators, trying to minimize downtime. 

Questions answered at this detailed level: 

• What runs on each machine on a daily basis from hour to hour? 
• How do we adjust for last-minute changes or unexpected delays? 

Example: Scheduling a specific machine/workstation to assemble the pieces of the air conditioner.

Inputs & outputs in the different levels of production planning from Introduction to Materials Management