What’s the Difference Between a Forecast and a Demand Plan?

What’s the difference between a forecast and a demand plan? A forecast is a prediction of demand based on a mathematical and statistical analysis of past demand. This mathematical forecast can and should be adjusted to reflect any knowledge or intelligence that the forecaster knows, that may affect future demand, but is not reflected in past history. That includes such things as expected competitive actions, new product introductions, business or demographic trends, or sales/marketing actions that the company may be planning itself.

The demand plan starts with the forecast, including the above-mentioned adjustments. Additional details can now be added to balance out the demand plan to include distribution considerations like distribution inventory optimization – where to hold inventory in the distribution chain – how demand is passed up through the chain through feeder warehouses and distribution centers, lot sizing and lead time for the transportation links that move inventory down through the chain, and any capacity or resource considerations that may impact the distribution plan. The end result – the demand plan – represents the best guess as to how finished goods will move from the source (factory) out to the final buyer or consumer.

Most companies start with forecasts for each product at each final distribution point, that is, each outlet where the customer orders and receives the goods. The inventory, or replenishment plan, for each outlet (store, distributor, shipping point) places demand on the warehouse(s) that provide the goods, and on up the chain. Ultimately, this distribution plan leads to a picture of the demand at the factory.

Production considerations are then factored in as part of the Sales & Operations Planning (S&OP) process. A first-cut production plan may reveal a sub-optimum use of resources. Planned production may be uneven with schedule conflicts and/or times where people and equipment are underutilized. There could be demand that can’t be accommodated because of unavailability of materials. It could be that the plan calls for making too much of low margin products at the expense of production capacity for the real money-makers.

The traditional response to these challenges would be for production to do whatever it takes to meet the demand. But that can be expensive, disruptive, and just plain impossible. Through the S&OP process, we have a dialog across all parts of the enterprise. A better solution might be to adjust the demand plan to support more efficient manufacturing operations. It could be as simple as changing inventory strategy in the distribution network, at the cost of additional inventory in places and/or higher risk of stockouts. Alternatively, sales and marketing may have to get involved to actually influence demand to better fit the needs of the enterprise. Product shortages or redeployment changes actual demand, of course, but it doesn’t have to be that drastic.

Sales and marketing have many tools that can be applied to increase or decrease demand for individual products, product lines, markets, or specific customers, agents or distributors. The S&OP process should result in a balanced supply and demand plan that minimizes inventory while meeting customer service (availability) target. The resulting demand plan becomes the marching orders for sales and marketing just as the production plan is the standard to which manufacturing is help accountable.

Editor’s Note:

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