Sales and operations planning is a tool for a business to coordinate all departments and ensure the entire organization is working together toward the same goals. Demand forecasting is a crucial piece of this planning process, allowing your company to look toward the future and determine how much inventory you will need for future sales.
There are two primary types of forecasting within the demand forecasting realm: constrained and unconstrained. An unconstrained demand forecast is easier to produce. Unfortunately, it does not consider some vital real-world capacity constraints and may lead you into trouble if followed without adjustments. However, a constrained demand forecast tends to be more accurate and reliable.
Clearly, a constrained forecast is the more reliable of the two options, but how do you get there? What constraints should you consider as you plan for the future?
Why You Need Both Types of Forecasting
While it’s true that an unconstrained forecast is less useful for supply planning than a constrained forecast, that doesn’t mean it’s totally useless.
First, it’s typically easiest to start with an unconstrained forecast and then apply constraints to it. As you create your constrained forecast, you’ll naturally need to understand the maximum demand you can expect regardless of any limitations you should be considering.
Next, an unconstrained forecast can be considered a maximum possible demand or a target to chase after. If your unconstrained forecast is typically much larger than your constrained forecast, it might be time to consider how to lift some of those constraints to allow your business to scale.
If your unconstrained forecast shows that you could sell a million units, but constraints bring that down to 500,000 units, you may be leaving money on the table. Perhaps you can raise your capacity by opening new stores or warehouses, or you can seek out new partnerships to allow you to procure more materials.
If you consistently fail to meet demand due to constraints, expect that a competitor will emerge to take advantage of that opportunity.
There are many ways your capacity can be constrained, and ensuring you apply the right constraints is critical as a mistake can lead to long-term losses and drive customers to your competition. These constraints could be due to:
- Labor capacity
- Equipment capacity
- Production line capacity
- Regulatory constraints
- Transportation capacity
- Warehouse space capacity
While many of these may seem like simple problems, it’s important to carefully consider any changes before making them.
Example: If you’re dealing with warehouse constraints, you might simply open a second warehouse. While that could solve the problem, it could just as easily cause a logistics problem as workers have to shuffle goods between the two locations.
Whenever you decide to make changes to your operations to alleviate capacity constraints, be sure to plan ahead for any potential problems they could cause.
Recent events have driven this particular problem home for many companies. The global supply chain is fragile, and when it breaks down, it can have far-reaching consequences.
Sometimes there is little you can do about the problem. If your product requires specific raw materials and those materials are currently not available anywhere, from any supplier, you may be at an impasse. Consider looking into recycling programs to see if you can recover any post-consumer materials, but this may not be possible depending on the situation.
In other cases, you may simply need more or different suppliers. If the supplier who provides your packaging can only ship 50,000 pieces a month and you need 75,000, look for another source.
Be careful to choose a new supplier who can more easily scale with your business. Instead of signing with someone who can supply up to 100,000 units, consider a supplier that can offer up to a million. This will keep you from further supply chain disruptions down the line.
Cash Flow Constraints
When you don’t have the cash available to afford the products you need to meet demand, you’re dealing with a cash flow constraint. You might consider taking out a loan in this instance, but be careful not to stretch your business too thin with repayments.
Look at more creative ways to handle the situation, such as renegotiating terms to pay a lower per-item rate for a larger number of items or find other ways to cut unnecessary expenses. Sometimes simply switching suppliers is enough to free up enough capital to meet demand.
Maximize Opportunity with Demand Forecasting from Blue Ridge Global
As you can see, demand forecasting can be a complex and multifaceted process. With so many moving parts, it’s easy to get lost in the data and fail to see the bigger picture or miss out on crucial information that could mean the difference between being in the red or in the black.
Blue Ridge Global offers software that can take the guesswork out of demand forecasting and help you create a more resilient supply chain overall. Our cloud-based solutions are designed to provide you with clear, accurate, and actionable data that can make the process so much easier.
Harness the powers of AI and machine learning to access insights that will fine-tune inventory decisions without the risk of relying on old or incomplete data. To learn how we can help optimize your demand forecasting constraints, request a demo today.