A forecast is an essential part of any manufacturing or distribution company’s business process – even lean and make-to-order companies forecast for resource planning and financial planning purposes. But a simple mathematical forecast, or a forecast developed informally from opinions and conjecture, is only the starting point in developing a functional plan for your business in the coming months and years. That overall operating plan is often called the Sales & Operations Plan (S&OP) and its function is to develop a balance between supply and demand. Supply takes the form of an operations (production) plan that is synced to the demand plan, which is based on the forecast, but it’s much more than that.
A simple forecast is the starting point for demand planning. Most demand planning software includes a forecasting application or will interface to a third-party forecasting package that generates a statistical forecast based on past demand data (sales history). But that assumes what happened in the past will continue into the future – and that is seldom the case. Most demand planners (and forecasters) will then apply other information to that basic forecast to reflect known or suspected changes to demand that are not reflected in the historical sales figures. These include changes to products, pricing, or distribution; external influences or clues like housing starts, unemployment figures, demographic data, and other external indicators; and anything you might know about competitors actions, market trends or indications you might have gathered from customers, distributors or market experts.
Up to this point, the outlined process is passive – simply trying to estimate what will happen under current conditions. Demand planning continues with a more active stage of strategic and tactical inputs to develop a plan for how marketing, promotion and distribution actions can shape demand to better fit production capabilities, inventory availability, and revenue/profit optimization. The forecast is passive; demand planning is active. There are certainly things that a company can do to change demand. If demand is too high for low margin products (higher than can be comfortably and profitably supported), demand can be attenuated by eliminating or reducing distribution in more difficult to serve markets, prices can be increased, sales incentives reduced, and promotional activities eliminated or changed. If there is available inventory or capacity that could be utilized for certain products, again, a company can influence (change) the demand by lowering price, increasing promotions and incentives, broadening distribution, etc.
Tuna and seafood canning company Chicken of the Sea is particularly active and dependent on demand planning and demand management as outlined in this case study that nicely illustrates how dynamic and interactive demand planning and marketing/distribution can and should work together to get the right products in the right quantities to the right outlets at the right time. While this is particularly important and visible in a promotionally-driven consumer product market, the principles of demand management and S&OP apply to all manufacturers and distributors whether consumer products or business-to-business. To get the most out of available resources and optimize profit and business success, supply and demand must be in sync. Demand planning and S&OP combine to give you the visibility and planning tools to make that happen.