I have often heard the terms sales forecasting and demand forecasting used synonymously. Though they both use past history to project the future, there are subtle differences between the two.

A sales forecast is prepared when one wants to forecast sales based on current or projected company performance. A sales forecast typically uses invoices as the input in either dollars or units and as such should directly correlate to the company’s income statement. By default, a sales forecast is ultimately tied to a company’s capacity to meet a certain amount of demand and reflects any inefficiencies and poor processes inherent within the company. For example, what if there is an unexpected stock-out that causes shipments to be delayed. Or a promotion that the company engages results in unexpected levels of demand that the company is unable to fulfill in a timely manner. These unplanned occurrences create a lag between demand and the company’s ability to generate revenue from that demand.

A quick measure of the demand versus revenue lag is on-time performance. On time performance less than 100%, if properly measured, is a measure of the company’s capability to meet its demand within the expectations of its market. Anything less than 100% on time performance leaves money on the table.

A demand forecast on the other hand typically looks at the data from an unfiltered point of view. I like to only look at this data from a unit measure since it is related to capacity. The data is culled from the companies order entry database and should be the customer’s original not negotiated requirement date and quantity. There could be bias in these numbers if the customer requirement dates are negotiated to reflect the availability of material or capacity but typically it is the closest to describing true demand.

The value of demand forecasting is that it provides the company with the clearest picture of what they need to do to meet the demand generated by their customers and the revenue opportunities available. It also takes into consideration the effects of promotions and other sales and marketing activities in a very direct manner. If the promotion causes a huge spike in demand that the company is unable to fulfill, this data directly shows the lost revenue opportunity.

The demand forecast is what we use when working with companies who desire to become lean. Since it can be a challenge to get your customers demand to run at a perfect tact, we aggregate the demand data in periodic buckets of months or weeks to understand how the demand has modulated over time. We then build the new lean production process with a capacity to moderately exceed the high point demand. I have seen other lean consultants simply take the entire year demand and generate an average tact.

Though the likelihood the future will follow the past varies by company and industry, the reality is that understanding the historical patterns and building processes within the company and its supply chain that have the flexibility to meet the patterns in the future allows for a much more responsive company.  A demand forecast provides us with the intelligence to do that.