At its most basic level, demand is the desire to own something, whether it be a physical object, experience or capability. Sales is the process by which people pay money to acquire something they demand. The two naturally go hand in hand, but for the two to equal one another, businesses must have the production capacity, technology, information and sales infrastructure to deliver what people want.
For a business to have sales that fully maximize available demand, it must have inventory capabilities to produce enough product in accordance with variations in demand. For some products, this may not always be the case. For example, a paper written by the Urban and Regional Innovation Research Unit in 2002 explained that all products have differing manufacturing cycles that affect how quickly they can be brought to market. While an electronic good such as an e-book could be modified immediately in response to a demand spike, an automobile manufacturer may take months or years to change its product in response to demand shocks.
Often demand will not equal sales because companies are not fully utilizing available technology to deliver a product. For example, the consulting firm Ventana Research conducted a study on the types of core processes that businesses employ and found that 35 percent of companies were not taking advantage of available technologies in areas like information technology, manufacturing and forecasting to fully align their production with available demand. According to the study, this can be due to simple ignorance or a fragmented decision making process within the company that puts a brake on efficient decision making.
Sometimes consumers will not know about a company that's making something they want. In her book "Demand Management," financial author Colleen Crum pointed out that many companies will fail to optimize their inventory levels because demand forecasters within the company pay more attention to their production technologies than the progress being made by their sales and marketing department. She even goes so far as to say that sales and marketing should be the first priority when maximizing sales for a product.
Businesses need accurate information about changes in demand to tweak their core processes and maximize sales. For this reason, accurate demand and sales forecasting is an important business function, and failure to do so properly often results in gaps between sales and demand. The study by Ventura Research found that only 9 percent of companies in its study were adequately incorporating its different departments into its demand forecasting, and as a result companies were not making production decisions with all the pertinent knowledge available, and their business processes suffered as a result.
- Demand Management Best Practices: Process, Principles, and Collaboration; Colleen Crum, et. al; May, 2003
- Information Week: Six Steps to Better Sales Forecasting and Demand Planning; Robert D. Kugel; July, 2008
- Northwestern University: Sales and Consumer Inventory; Igel Hendel, et. al; June, 2005
- Brunel University: Forecasting; J E Beasley
- Urban and Regional Innovation Research Unit: Product Life Cycle Management; Ioannis Komninos; 2002
Jonathan Bechtel is a former banker and start-up founder who has written since 2008 on the topics of banking, finance and business strategy. His advice and tips have been featured on Fox Business, Yahoo! Finance and AOL money. Jonathan holds a Bachelor of Science in nutrition from the Ohio State University.