skip to Main Content

The Forecast and the Plan: What’s the Difference?


Imagine a new professional, walking into her first Sales and Operations Planning Meeting at the multinational corporation who hired her only a few weeks earlier. This is a big moment for the new employee.

The meeting might be awash with numbers, spreadsheets, graphs, and interactions between people that she doesn’t yet understand completely. Managers might talk a language that is rather unfamiliar. She understandably may feel somewhat overwhelmed.

The language of Supply Chain Management is important. Practitioners need to take special care to define terminology clearly, to avoid misunderstandings. As a relatively new business concept, SCM strives to promote a common lexicon that is universally recognized and accepted.

Frequently, for example, business people use the terms “forecast” and “plan” as if they are synonymous. But these two words carry very different meanings and the implications of confusing the two can be significant.

A forecast is a prediction of future events, using a means other than simply making a blind guess.

A plan, on the other hand, is an articulation of how a company intends to respond to a demand forecast. Ultimately, the plan integrates many other factors in addition to the forecast in order to set operational direction for the business.

There are many types of forecasts that are used in business. Companies assemble technological forecasts, economic forecasts, and demand forecasts. It is the demand forecast that is of greatest interest to an operations manager, and supporting the fulfillment of future demand is of critical importance to supply chain professionals. We use demand forecasts to help us plan capacity, human resources, and logistics strategies.

We understand that, because of the myriad variables at play, forecasts are rarely 100% accurate. In spite of the shortcomings, forecasting is an essential part of planning for the future. By taking the time to operationalize the forecast and develop a plan, we are forced to think through potential positive or negative scenarios. Over time, careful forecasting will lead to more efficient and realistic planning.

In contrast to forecasting, planning is the process whereby a business considers all strengths, weaknesses, opportunities, and threats, and provides direction to the company in its entirety. The plan metabolizes not only the forecast, but it also balances demand with the company’s ability to fulfill demand. These two sides of the scale are sometimes referred to as “priority” (demand) and capacity (supply). Further, the plan can articulate methods by which a business will try to influence the forecast, perhaps by increasing demand or shifting the timing of demand through marketing.

Companies that use a formalized Manufacturing Planning and Control (MPC) architecture will direct different levels of forecasts toward different levels within the planning hierarchy.

Highly aggregated forecasts of future demand and economic conditions will be directed toward the Strategic Planning activities near the top of the MPC hierarchy. Somewhat disaggregated forecasts at product category of  family levels will be of greatest interest to the Sales and Operations Planning functions that are undertaken by mid-level management. Very detailed item-level forecasts for finished goods will be used most commonly in the Master Production Scheduling (MPS) and Control activities. It is important that the SCM professional use forecasting techniques and approaches that match the intended use of the forecast.

Taking the demand forecast into consideration and combining it with other forces that come to bear on the company such as the labor market, economies of scale, and the potential for realizing manufacturing efficiencies, business leaders might choose between a level, chase or hybrid production strategy. Depending upon the production strategy used, the forecast and the operational plan can be at significant variance from each other, and this will be by design.

Operations managers are responsible to achieve planned production levels, and through this key performance metric, operations will support fulfillment of demand and will support marketing sales strategies. Financial plans will flow from the construction of sales and operational plans, resulting in the calculation of cash flow, inventory, and profitability projections.

Sales and Operations Planning (S&OP) activities provide a key link between the market (external to the business) and internal manufacturing processes. S&OP drives the Master Production Schedule (MPS), which is the time-phased statement of what quantities of finished goods are required, and precisely when those quantities are required. Manufacturing is held responsible to complete the MPS. This activity is frequently called “hitting the schedule.”

It is not unusual that, as the year progresses, new demand forecast information comes to light that puts sales potential at wider variance from the production plan than was originally foreseen. It is through a disciplined monthly S&OP process that such differences become reconciled. Appropriate adjustments to the plan are made in response.

 In summary, we have seen that the operations plan is not a forecast of demand. Rather, the demand forecast becomes metabolized in the business through Sales and Operations Planning. S&OP takes into consideration not only the demand forecast, but also constraints faced by the business, technological realities, marketing initiatives, and financial targets. Output from the S&OP process becomes a key input to the Master Production Schedule, achievement of which is a key focus of the manufacturing team. Production strategy works to decouple the forecast from the production plan, even as manufacturing execution supports the sales plan.

Contact us if you would like to learn how DemandCaster can help you reap the benefits of effective S&OP planning.

Related Articles

Is S&OP owned by supply chain?

S&OP is commonly under supply chain, but should it be? The Institute of Business Forecasting & Planning said, “As S&OP maturity evolves the requirement for ownership of the process becomes more and more focused on business leadership and decision-making.” It [...]

Why you should be using an S&OP Calendar

Do you use your S&OP calendar? It is a great tool to help you meet your goals and work together. The Institute of Business Forecasting & Planning noted, “By consistently indicating where they contribute in the process, and indicating that [...]

Working on your S&OP tech

Technology can be instrumental in bettering your sales and operations planning. The APQC blog said, “Specific industries are adopting technology such as AI and data analytics to address planning challenges, which indicates a critical competitive shift other organizations will soon [...]

S&OP vs. SIOP: What’s the Difference?

From one perspective, there is very little difference between “sales and operations planning (S&OP)” and “sales, inventory, and operations planning (SIOP)” because the overall objective is the same for both: Get the right inventory to the right place at the [...]

Seven Advantages of Integrated Demand and Supply Planning

A championship football team reaches such heights because of teamwork, practice, and a clear strategy.  Both offensively and defensively, team members are drilled over and over to work together and know the plan so that on game day, everyone is [...]

Are you utilizing technology for S&OP?

Technology keeps getting better in sales and operations planning, and businesses are really utilizing it! Supply Chain Management Review reported, “Nearly 70% of the respondents in APQC’s survey of S&OP professionals consider technology to be an extremely critical or very [...]

Places to Improve in your S&OP Process

Process and technology may be improving S&OP, but there are always places to improve. As much as possible, try to get your executive team informed and in the loop. Kumar Singh said, “Supply chains are becoming increasingly complex and as [...]

Is your Sales and Operations Planning just Mediocre?

Even in the places you think you’re doing a good job, there is often room to improve. Ventana Research reported that many companies are not doing as well as they might think saying, “The Dynamic Insight analysis suggests that many [...]

MRP – A Key Enabler of Agile Manufacturing

Over its roughly fifty-year lifespan, Material Requirements Planning (MRP) has been established as one of the most powerful and influential innovations in manufacturing technology. Introduced and popularized by Joseph Orlicky through his book Material Requirements Planning (MRP): The New Way [...]

Collaboration Between Sales and Demand Planning

Creating channels for efficient communication and collaboration between your sales department and demand planning can have great results. The Institute of Business Forecasting & Planning said, “This allows the organization to capture what we know in current sales levels and [...]
Subscribe to our Blog
Back To Top