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July 17, 2023

What’s the difference between a forecast and a plan?

In this video, we will discuss the difference between demand forecasting and demand planning. We will explore the following topics:
- What is a forecast?
- What is a plan?
- The difference between a forecast and a plan
- The importance of demand planning

Demand forecasting and demand planning are two important concepts in supply chain management. However, they are not the same thing.

A forecast is an estimate of what an organization expects to sell under a certain set of assumptions. A plan, on the other hand, is a set of actions and decisions that an organization is committed to taking.

The difference between a forecast and a plan is that a forecast is a range of possibilities, while a plan is a specific course of action. The forecast feeds the plan, but the plan is not simply a reflection of the forecast.

The importance of demand planning cannot be overstated. A good demand plan can help an organization to avoid stockouts and excess inventory, meet customer demand, and improve profitability.

Okay, so it's very interesting. You're talking about demand forecasting and Demand Planning. What are they, different things or are they the same thing? That's a good question.

What's the forecast? The forecast is an estimate of what the organization expects to sell under a certain set of assumptions, market assumptions, commercial assumptions. So the forecast could be 100 or it could be 120 under a different set of pricing assumptions It could be 140 under a different set of pricing assumptions. But the question is what is the supply chain cost and risk we are willing to take associated with the forecast?

The risk associated with the 120 forecast is higher than the risk associated with 100 forecast because you might have to buffer for more inventory. And if the demand does not materialize, then you are stuck with that inventory. If the demand forecast that you planned for is 140, then the risk that you are taking the supply chain is higher if the demand does not materialize. So the planning process is really about taking the possibilities of the forecast, i.e. the forecast range of possibilities of the forecast Right?

And then estimating what the risk and the ability of the supply chain to support it is. And then finalizing a plan. A Plan is an estimate of what we are aligned to sell based on our assessment of the risk of the forecast and what actions we are willing to take to support that forecast. So the forecast could be 100 120 or 140, depending on various assumptions of commercial and market assumptions.

But the plan that we decided could be let's operate the supply chain at 120 demand, because that's the amount of risk that we are willing to take. So that's the difference between a forecast and a plan. Plan is a set of actions and decisions that we are committed to taking. The forecast is a range of possibilities which feeds the plan.

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