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2. Demand, Sales, and Plans

Teaching rewrite — the Objective step of the framework. Original wording; the ice-cream truck is a running toy example.

Introduction​

Before asking how to forecast, ask what you are forecasting. Many companies say “demand forecast” but actually forecast sales, or quietly copy the budget, or let sales targets leak into the numbers. Each of these mixes up a prediction with a constraint or a goal — and leads to politics, wishful thinking, and a self-reinforcing cycle of shortages.

This lesson covers:

  • Why we forecast demand at all: a means, not an end
  • Demand vs sales vs supply
  • The sales-forecasting vicious circle
  • Turning a demand forecast into a sales or revenue forecast
  • How a demand forecast differs from a supply plan, a financial budget, and sales targets

2.1 Why forecast demand?​

Good decisions need good information. Buying a house, you would want to know its condition, the expected repairs, and where local prices are heading. In a supply chain, decisions about buying, producing, shipping, and storing all rely — at least partly — on how much customers will want.

The demand planner’s objective: produce the best possible picture of future demand, so other teams can make better decisions. The forecast is a means, not the end.

2.2 Demand, supply, and sales​

Imagine you run an ice-cream truck.

TermMeaningIce-cream example
DemandWhat customers want, how much, and when — unconstrained by your stock15 children want chocolate cones tomorrow
Demand forecastYour prediction of future demand“I expect 15 chocolate cones tomorrow”
SupplyWhat you have available10 chocolate cones in the freezer
SalesWhere demand meets supply — constrained10 cones sold; 5 children disappointed
flowchart LR
  D[Demand<br/>what customers want] --> S{Supply available?}
  S -- yes --> SA[Sale]
  S -- no --> L[Lost or delayed demand]

Sales equal demand only when there is enough supply.

The sales-forecasting vicious circle​

Suppose chocolate runs out and you forecast sales:

flowchart LR
  A[Shortage] --> B[No sales recorded]
  B --> C[Sales forecast = 0]
  C --> D[Supply plan = 0]
  D --> A
  1. Out of stock → zero chocolate sales.
  2. Forecast based on sales → zero chocolate tomorrow.
  3. Purchasing replenishes based on the forecast → orders zero.
  4. No stock arrives → zero sales again… and the cycle repeats.

The worst part: every KPI looks perfect. Forecast 0, sold 0 → 100% accuracy. Stock target 0, stock 0 → 100% inventory adherence. Everyone hits their metric while the business loses every chocolate sale.

Forecasting demand breaks the circle: the forecast stays at ~15, purchasing reorders, children get their cones.

Watch the KPIs

A metric that is perfectly satisfied by a broken process is a warning sign. Accuracy measured against constrained sales can reward forecasting shortages.

From demand forecast to sales and revenue forecasts​

Finance still needs expected sales and revenue. Derive them from the demand forecast — never the other way round:

flowchart LR
  DF[Unconstrained<br/>demand forecast] -->|constrain by expected supply| SF[Sales forecast]
  SF -->|× expected price| RF[Revenue forecast]

Worked example: constraining the forecast​

FlavourDemand forecast (next week)Expected available supplySales forecastPriceRevenue forecast
Chocolate10003.000.00
Vanilla2025202.5050.00
Strawberry12882.8022.40
Total422872.40
  • Purchasing receives the demand forecast (42; chocolate 10) so it can replenish correctly.
  • Finance receives the sales/revenue forecast (28 units; 72.40).

Sales forecast for each item = min(demand forecast, available supply).

Checkpoint: demand vs sales​

Quiz

Checkpoint — sections 2.1 and 2.2

1 / 4

Which statement defines demand correctly?

Pick an answer to see if you are right.

2.3 Forecast vs plan vs budget vs target​

ConceptWhat it isOwnerNature
Demand forecastBest unbiased estimate of what customers will wantDemand planningPrediction
Supply planHow much to buy, produce, and shipSupply planningDecision (uses forecast + constraints + stock targets)
Financial budgetExpected revenues and costs for the yearFinanceCommitment/plan, often political
Sales targetVolume salespeople must reach for a bonusSales/HRIncentive

Supply plan​

The supply plan uses the forecast but is not the forecast. Example: forecast 10, decide to make 15 (safety margin), sell 8. Three different numbers, three different meanings — forecast → decision → what happened.

Financial budget​

Revenue in the budget comes from expected sales, which come from expected demand constrained by supply. Using the budget as the demand forecast reverses the logic and imports wishful thinking — a major source of judgmental bias.

Sales targets​

Targets motivate salespeople. But if targets are derived from the forecast, salespeople have a reason to talk the forecast down (easier targets) while asking for plenty of supply (to sell more).

Worked example: incentives at work​

Honest viewAfter sales lobbying
Demand forecast107
Supply plan1515 (sales asks to keep it)
Sales target (forecast + 20%)12≈ 8.4

Actual sales come in at 10: the salesperson beats the lowered target by about 19% and earns a bonus, while the business planned against a forecast that was 30% too low.

Checkpoint: forecasts, plans, budgets, targets​

Quiz

Checkpoint — section 2.3

1 / 4

Forecast 100, production 120, actual sales 95. Which number is the supply plan?

Pick an answer to see if you are right.

Rank: cleaning up a forecasting process​

Quiz

Separate prediction from decisions and goals

1 / 2

A company forecasts invoiced sales and copies them into the budget. Rank the fixes.

OrderDrag the handle to rearrange — top should be first.

  1. 1Build the budget and targets from those figures — never the reverse.
  2. 2Start recording demand (orders, requested dates) instead of only shipments.
  3. 3Track bias to detect pressure from targets.
  4. 4Derive sales and revenue forecasts by constraining demand with supply and prices.
  5. 5Agree that the forecast must predict unconstrained demand.

Drag items into the correct order (or use ↑↓), then check.

Check: demand, sales, and plans​

Quiz

Demand, sales, and plans

1 / 5

Sales equal demand when…

Pick an answer to see if you are right.

Takeaways​

Remember
  • Forecast demand (what customers want), not sales (what supply allowed)
  • Sales-based forecasts create a vicious circle of shortages — with perfect-looking KPIs
  • Sales forecast = demand forecast constrained by supply; revenue = × price
  • Forecast ≠ supply plan ≠ budget ≠ sales target: prediction, decision, commitment, incentive
  • Keep budgets and targets downstream of the forecast to avoid wishful thinking and lobbying

Further Reading​