Blog posts: Supply Chain Management for SAP ERP

What You Need To Know About An SAP Unconstrained Demand Plan vs. A Constrained Demand Plan


Understanding Constrained vs. Unconstrained Demand Planning


The decision of which type of Demand Planning to implement will have significant impact on an organization's ability to identify and respond to consumption trends at the most granular level of the business; where customer preference and profit are decided. The distinction between the two approaches can best be summarized by these two questions:


How do we sell what we have made? vs. How do we make what our customers want?


A constrained demand plan is a forecast of sales, limited by the operational capabilities of the business. More specifically, factors affecting the supply of materials such as production capacity, components, labor, and cash flow all conspire to limit fulfillment of raw customer demand. Think of a constrained forecast as supply-side focused.

An unconstrained demand plan is focused on pure customer demand, unfettered by subsequent supply constraints. Based solely on market demand and ignoring supply-side capacity constraints, it asks: what is the total number of products the business could sell?


What are the benefits to demand-driven planning?


Consider this scenario: A customer orders 150 units of Product A but only 100 are available. The customer accepts the reduced quantity and either cancels the balance or agrees to substitute the original, unmet demand with Product B. Using a constrained planning strategy, the future forecast for Product A will be driven by a demand signal of 100 units, and Product B will have a new demand signal of 50 units. Neither of these demand signals represent the actual customer demand.

By planning based on a constrained model, the original service interruption will be propagated into the future. The next time that customer orders 150 units and gets shorted may be the last time that customer places an order.

A demand-driven business has an outside-in orientation: "What does the market require, and how can that demand be met profitably?" A supply driven business has an inside-out orientation. Unless you have perfect supply, a supply-based orientation will limit growth and competitiveness.


Comparing demand that is constrained and unconstrained:


When it comes to sales forecasting, your team will have better information to work from when you adopt an unconstrained method for calculating demand. For companies running SAP, the framework of an SAP unconstrained demand plan enables users to examine the true selling potential of their products.

Otherwise, it can be tricky to figure out how to reasonably limit inventory so it’s not such a burden on revenue flow but not so small that customers complain about a lack of product availability and consequently shift their demand to your competitors.


Benefits of Demand Planning


The ability to plan how to meet the highest level of customer demand is one of the biggest advantages of planning demand using unconstrained forecasts. This might involve a variety of processes, such as expanding your production capacity, onboarding new team members, or redefining agreements with suppliers and distributors.

On the other hand, companies can also benefit if the forecast indicates a much lower unconstrained demand. This may be an indicator that marketing and sales processes need improvement, certain products should be discontinued, or even that a smaller staff is required. Businesses typically incorporate demand forecasting constraints at the supply planning stage of their S&OP process and use those numbers for production planning systems to accurately reflect the organization's capacity and resource limitations.


A Hybrid Approach


Sometimes organizations find it useful to combine the two approaches: begin with an unconstrained forecast to get a sense of what customer demand may look like and then incorporate constrained forecast inputs and supply shortages to show what's feasible. This provides a comprehensive view of what’s possible in the market now for a company’s goods or services. The expression “knowledge is power” certainly applies to the vast amount of data obtained when working with unconstrained forecasts.


Partner Sources:
Demand Caster
Unleashed Software

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