December 1, 2023
What’s the difference between a forecast and a plan?
Demand forecasting and demand planning are interrelated yet distinct processes.
What Is a Forecast?
Forecasting is the discipline of predicting a range of possibilities in the future. Often expressed as a demand curve, a forecast is generally not one number, such as 120 units, but a probabilistic range of outcomes, such as between 100 to 140 units.
Imagine an apparel organization forecasting demand for shoes. The range of outcomes may be between 100 and 140 shoes depending on the assumptions built into the forecasting model. Each possible outcome—customers buying between 100 and 140 shoes—has a certain level of risk associated with it.
If you aim low with the 100-unit forecast, you may lose out on additional sales and negatively impact customer service levels, but your risk of ending up with additional inventory is much lower. If you aim high with the 140-unit forecast, you will maximize sales, but if demand doesn’t materialize at 140 units, you will be stuck with additional inventory.
What Is a Demand Plan?
Demand planning is the discipline of deciding what level of risk your organization is willing to accept based on the range of possibilities established in the forecast, assessing the ability of the supply chain to support the forecast, and finalizing a plan of action to support it.
Imagine the same organization forecasting the demand for a certain type of shoe at the regional level over three months. Their models predict the probability being high that 12,000 of these shoes will be sold over the next three months across all the stores in that particular region. They then assess the risk of being wrong. They perform a risk assessment and determine that, in the worst-case scenario, they will end up with 2,000 additional units, the cost of which to produce and maintain being low compared to the revenue generated if only 10,000 units are sold. They then assess the ability of the supply side to support the demand and find that the supply chain can meet the needs of the forecast. Finally, they formulate and finalize an actionable plan to support the demand.
The Takeaways
- A demand forecast is an estimate of what an organization expects to sell under a certain set of market and commercial assumptions.
- A demand plan is a set of actions and decisions that an organization takes based on which forecast they commit to acting on.
