Whether to constrain the demand plan can be a tricky topic. We say that the best practice is to plan unconstrained demand, but what does that mean, exactly?
The difference between constrained and unconstrained demand pertains to our ability to meet and satisfy that demand with our planned supply capabilities. Unconstrained demand does not mean aspirational, or some amount of demand that could be achieved with uncapped selling and marketing resources. Unconstrained demand simply means that which we could sell if there were no supply constraints.
In some situations, it can be very difficult to determine what unconstrained demand truly is – particularly where there has been a chronic supply constraint. If you are selling everything that you can make, then it can be difficult to know what the upper bound to demand might be. However, if you don’t establish consensus to the assumptions and sizing of unconstrained demand, you won’t have agreement on what the opportunity cost is. That will lead to challenges in adding capacity and allocating resources. In my experience this often leads to in-fighting between Sales and Supply. Sales abdicates their responsibility to plan because it appears pointless, and Supply is left guessing, and many times takes a conservative stance not wanting to be the one left holding the bag of excess capacity and unsold inventory.
When we look out over the horizon, different actions will be relevant over different time frames. Outside of the “execution” horizon (usually defined by the cumulative lead time to manufacture what you sell) we are sizing the business. Having an aligned view to unconstrained demand is key to driving the right actions to properly size the supply chain to respond. However, within the execution horizon things are a bit different. There is less flexibility and responding to changes in demand becomes much more costly. If the cross-functional leadership team decides that the best course of action for the business is to live with a supply constraint, then that decision should trigger to shift from unconstrained to constrained planning.
With that shift, Sales is not off the hook for planning. Quite the opposite. Sales then becomes responsible for prioritizing demand and allocating the constrained supply in a way that best achieves commercial objectives. No order should be shipped without Sales providing a clear priority. This is key to ensure that commercial commitments are kept, hoarding is avoided (e.g. toilet paper), stock-outs at shelf are minimized, and revenue and profit is maximized.
Greg Spira 