skip to Main Content

Unconstrained Forecast or Constrained Forecast? Why do they matter?

S&OP  
07/07/2015

When it comes to Sales and Operations Planning,  stakeholders at all levels can sometimes find it hard to understand different concepts and the important underlying strategy involved. One of the most important topics I have found in the S&OP process that seems to drive people crazy is The Unconstrained Sales Forecast vs. The Constrained Sales Forecast.  The quick explanation is, the start of your S&OP process is an Unconstrained Forecast and the byproduct of your S&OP process is a constrained forecast.

The unconstrained forecast can be confusing to some. The unconstrained forecast is based off the true demand potential that exist when running your forecast with no consideration given to constraints that may exist, such as capacity, materials, cash-flow,etc. The constrained forecast is a forecast constrained by the operations side of the business such as capacity, materials, cash-flow, etc.

A simple example of an unconstrained forecast is: "We only have capacity for 500,000 light bulbs per month. If I have demand signals for 1 million light bulbs per month my unconstrained forecast will show 1 million light bulbs per month."

So, now that we understand what the unconstrained forecast is, why is it important, especially considering the final plan in the S&OP process after being vetted through the supply side will end as a constrained plan that is a reflection of what can actually be achieved. So why waste your time playing pretend and imagining we live in some perfect world where we have no limitations?

Just because your unconstrained forecast gets chopped down to reality, a mature S&OP process will keep the unconstrained forecast as a valuable resource to present to the executive team, in the Executive S&OP meeting. A note on this, be cautious you avoid confusion of people thinking multiple plans are floating around, by the time you are in the Executive S&OP meeting your Constrained forecast is the plan.

Why present the unconstrained forecast to the executive team? Let’s bring everything together now and talk about strategy. Using the lighting company I mentioned earlier, lets assume that the unconstrained forecast reflects 1 million units of light bulbs per month, but you are constrained to 500,000 units a month. The S&OP process has now set the stage for the executive team to easily be alerted to the 500,000 units of potential lost sales per month. Knowing this information should trigger the executive team to implement a strategic plan to increase capacity and handle the constraint hurdles. Below is a visual to help.

So, why is the unconstrained forecast so important? It is the key signal your executive team needs to plan for the future. The executives now have the information to decide if they need to build more manufacturing plants, raise capital, re-negotiate with vendors, hire more employees, etc. On the flip side to this, there may also be the situation where your unconstrained forecast is too low, this will give your executive team the information to make serious decisions in the business such as reduction in force, plant closures, and re-evaluating current sales strategies.

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