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Frequently Asked Questions Vol. 7

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Question #7: What is better: generating constrained or unconstrained demand forecasts?

The short answer: you should strive to generate unconstrained demand forecasts. That is, consider what demand would be completely independent of any supply-side constraints. We know that this may seem a little counter intuitive; the obvious argument against is that these are unrealistic forecasts that can never be met.

Yet even if there are substantial supply-side constraints, knowing what your demand levels could be if you were completely free of those will undoubtedly help you understand your potential for growth. It’s fantastic for long-term planning and may even provide a case for exploring new suppliers or other avenues for meeting that demand.

Better than unconstrained forecasts, however, are “supply-neutral” ones, which take the concept one step further. In an article in the Journal of Business Forecasting, Dr. Larry Lapide argues that demand is affected by many factors, some of which aren’t as obvious as shortages in supply. Customers, he says, may be “conditioned” to buy in accordance with availability, and this can be done consciously or unconsciously.

While this is not necessarily bad, you should strive to recognize and eliminate in your demand forecasts what Dr. Lapide calls “supply-related distortions.” That way, unconscious demand drivers become conscious ones, and your company will have a better grasp on how to plan for and even influence demand to your advantage.

 

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