An unconstrained demand forecast might seem over optimistic, but for a business to take full advantage of market growth opportunities it is essential to dream big. Particularly for companies using online inventory management systems, it’s easy to create both constrained and unconstrained demand forecasts that each represent valuable snapshots of what your business is, and what your business could be.
What is a constrained forecast?
A constrained forecast is a forecast of sales or delivery volume that is realistically limited by the operational abilities and supply capacity of the business – particularly factors affecting the supply of materials, availability of labour, production capacity and cashflow. Think of a constrained forecast as supply-side focused.
Constrained demand forecasts ask the question – given production capacity and market demand, what is the total number of products your business can expect to sell? It is important for businesses to understand their realistic production capacity in order to inform and improve operations strategies and maximise actual sales.
What is an unconstrained forecast?
An unconstrained demand forecast is focused on demand potential. It asks – what is the total number of products your business could sell based solely on market demand, ignoring supply-side capacity constraints?
Take no consideration of any constraints to your ability to meet the total forecast market demand. You might not have enough capital to purchase necessary supplies or maintain equipment, for example. You may not have sufficient manufacturing or stock holding capacity to increase turnover. You might simply not have the manpower to answer all the sales enquiries that are clogging your phone line, or an online inventory management and ordering system!
If you could access all needed materials and labour, fully increase production capacity and meet all anticipated market demand, how many sales could you make? That is your unconstrained forecast.
Are unconstrained forecasts 100% unconstrained?
Unconstrained refers to the unconstrained forecast being a view of anticipated sales volume unaffected or limited by supply-side constraints.
To be effective, an unconstrained forecast must take into account, and be “constrained” by, market trends, currently planned sales and marketing activity and expected competitor or market changes. It is a projected view of potential sales volume based on realistic analysis of actual expected demand. It’s nice to dream that 10 billion consumers will want to buy your vacuum cleaner, but with only seven billion people on the planet it’s probably not worth planning and paying to boost capacity to build 10 billion units. That’s not an unconstrained demand, it’s unrealistic demand.
Forecasting maximises opportunity
An unconstrained forecast is more imaginative than a supply-side-constrained forecast. It plays a vital role in the formation of business strategy, helping management to plan for future growth. Imagine you sell vacuum cleaners. Your unconstrained demand forecast suggests there are buyers for 1 million units annually, but your supply-side constraints (your constrained forecast) limit you to producing just 500,000 vacuum cleaners each year.
This information will help management to make strategic decisions about where to invest in the business to maximise its ability to take advantage of unmet demand. In the above scenario, half a million vacuum cleaner sales are being lost each year, with your profits being potentially sucked up by more responsive competitors.
With clear forecasts, both constrained and unconstrained, management can maximise a company’s ability to meet sales demands and implement strategic plans to increase capacity and reduce supply-side constraints to grow future sales.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.