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.