Demand Forecasting Constraints

Sales and operations planning is a tool that coordinates multiple departments to ensure your entire organization works toward the same goals. Demand forecasting is a crucial piece of this process in which you predict how much inventory you will need for future sales. There are two primary types — constrained and unconstrained.

While an unconstrained demand forecast is easier to produce, it does not consider some vital real-world capacity constraints and may lead you into trouble if followed without adjustments. A constrained demand forecast tends to be more accurate and reliable. Combining these elements in your planning can help you develop creative strategies for meeting changing demands.

Constrained vs. Unconstrained Demand Forecasting

Demand constraints are the limits resulting from factors like regulations, cash flow and production capacity. Alternatively, unconstrained demand has no supply constraints. Organizations typically use unconstrained demand to determine their maximum sales opportunity and market potential if they could fulfill every order.

While unconstrained forecasting may be less effective for supply planning, you can still use it to visualize your organization’s potential.

How to Integrate Both Types of Forecasting

It’s typically easiest to start with an unconstrained forecast and apply constraints to it. As you do so, you’ll naturally need to understand the maximum demand you can expect, regardless of any limitations you should consider.

Next, an unconstrained forecast can be a maximum possible demand or a target to chase. You can also use this opportunity to incentivize continued growth. If your unconstrained forecast is typically much larger than your constrained forecast, it might be time to consider how to remove some of those constraints to allow your business to scale.

For example, you may leave money on the table if your unconstrained forecast shows you could sell a million units, but constraints bring that down to 500,000 units. Perhaps you can raise your capacity by opening new stores or warehouses or forming new partnerships that allow you to procure more materials. However, if you consistently fail to meet demand due to constraints, anticipate a competitor taking advantage of that opportunity.

Constraints to Consider as You Plan

Understanding constraints that directly impact your company can help you stay ahead of the curve. Here are factors to consider as you balance demand and available resources.

1. Capacity

You must find ways to reduce capacity-related constraints, which can lead to long-term losses and drive customers to your competition. Whenever you change your operations to alleviate capacity constraints like these, try to anticipate the ripple effects they may create.

• Labor: Global labor shortages, strikes and layoffs can create resource shortfalls in sectors like manufacturing.
• Equipment: Your organization may face physical limitations, such as the amount or type of equipment you have at your disposal. Technical issues like breakdowns or malfunctions can disrupt the supply chain and your organization’s output.
• Production line: A lack of equipment, materials, labor or time can restrain your production line capacity, preventing you from responding to high demand.
• Regulatory: Solving circumstances beyond your control can be challenging. For example, changing regulations that limit truck drivers’ hours of service may make your organization less productive. Additionally, government guidelines or compliance policies can restrict your resource allocation.
• Transportation: Your organization must transport your products to customers. However, poor budgeting makes it challenging to invest in new vehicles, while labor shortages can leave you with a driver shortage. Extreme weather also affects transportation, logistics, capacity and market conditions.
• Warehouse space: A lack of warehouse space directly affects your inventory and may limit your ability to expand into different product lines.

Some of these constraints may seem like simple problems, but you should carefully consider the far-reaching impact on other aspects of your supply chain. For example, you may think about buying a second warehouse if your current storage space is too small. While that could solve the problem, it could just as easily cause logistics bottlenecks when workers must move goods between the two locations.

2. Materials

The global supply chain is fragile. When it breaks down, it can have far-reaching consequences, like difficulty sourcing raw materials. Sometimes, there is little you can do about the problem. For instance, you may be at an impasse if your product requires specific raw materials that are unavailable. You could research  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 need more or different suppliers. If your packaging vendor can only ship 50,000 pieces a month and you need 75,000, look for another source.

Another consideration is 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. A flexible supplier can help prevent further supply chain disruptions down the line.

3. Cash Flow

When you don’t have the funds 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 for more creative ways to handle the situation, such as renegotiating terms to pay a lower per-item rate for bulk orders or trimming unnecessary expenses. Sometimes, switching suppliers frees up enough capital to meet demand.

Maximize Opportunity With Demand Forecasting From Blue Ridge Global

Demand forecasting can be a complex and multifaceted process. With so many moving parts, it’s easy to get lost in the data, fail to see the bigger picture and overlook crucial information that could mean the difference between being profitable or operating at a loss.

Blue Ridge Global offers software to take the guesswork out of demand forecasting and help you create a more resilient supply chain. We have designed our cloud-based solutions to provide clear, accurate and actionable data to improve planning precision.

Harness the powers of AI and machine learning to access insights that will fine-tune inventory decisions. Instead of taking a chance on old or incomplete data, you can rely on our intelligent software to give you confidence in supply chain planning. To learn how we can help optimize your demand forecasting constraints, request a demo today.