Constrained vs Unconstrained Demand and S&OP

Does this sound familiar?

The Sales VP is agitated…very agitated. “Don’t tell me what you CANNOT do, I made the sale, now you fill the orders!!!” The Operations VP responds in kind, “Your forecast was not even close to what you just booked. We cannot increase supply that fast!”

Where do they fit in an S&OP cycle?

Sales and Operations Planning serves as a critical process to project, balance and manage the integration of supply and demand. The process starts with the demand signal. The Sales organization collects bottom-up forecasts from the distributed sales force. Sales management provides a top-down review injecting market and product insights. At this point, no supply constraints have been levied to temper the forecast. Thus, we refer to this as an unconstrained demand forecast.

The S&OP cycle continues with demand and supply reviews. The intent of these cycle steps is to validate assumptions, check reasonableness and align resource plans needed to support planned demand. Although planning horizons vary from one business to the next, in general, manufacturers must commit in advance to facilities, material purchases and even labor. These supply side plans will limit the ability of the organization to significantly exceed its projected business level. Limitations tend to be tighter in the near term with greater flexibility in the medium to long term.

Through the S&OP process, the organization sets a projected business level that balances expected sales and production capabilities with financial and inventory implications. The constrained demand plan reflects a demand plan aligned with the supply plan.

Do we need both?

Many companies find it useful to distinguish and track the gap between unconstrained and constrained demand plans. An increasing gap may indicate lost opportunity to realize sales that exceed current capacity. Companies should scrutinize unconstrained demand signals to verify demand is real versus “pie-in-the-sky”. Long term capital improvements aimed at increasing capacity need to be aligned with realistic projections of future demand.

Finally, the constrained demand plan feeds a consensus plan to which the organization agrees to execute. Our Sales and Operations VPs need to stop fighting and starting aligning. S&OP facilitates this necessary collaboration.

Reduce Surprises. Reduce Inventory. Improve Operational Efficiency. Increase Sales.

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