Demand Prioritization and Order Promising

Demand Prioritization and Order Promising: A Comprehensive CPIM Exam Guide

Introduction

Demand prioritization and order promising are critical components of demand planning within the CPIM (Certified in Planning and Inventory Management) body of knowledge. These processes ensure that when supply is limited or constrained, the right customers receive the right products at the right time, based on strategically defined priorities. Understanding these concepts is essential for both real-world supply chain management and for success on the CPIM exam.

Why Demand Prioritization and Order Promising Are Important

In an ideal world, every customer order would be fulfilled immediately and completely. However, supply chains regularly face constraints such as limited production capacity, raw material shortages, transportation bottlenecks, and seasonal demand surges. When demand exceeds supply, organizations must make difficult decisions about which orders to fulfill first.

Without a structured approach to demand prioritization and order promising:

• Key customers may lose confidence and switch to competitors
• Revenue may be lost due to poor allocation of scarce resources
• Customer service levels may decline unpredictably
• Sales teams may make promises that operations cannot keep, leading to broken commitments
• Inventory may be allocated inefficiently, serving low-value orders while high-value ones go unfulfilled

By implementing formal demand prioritization and order promising processes, organizations can:

• Protect strategic customer relationships by ensuring high-priority customers are served first
• Maximize revenue and profitability by allocating scarce supply to the most valuable demand
• Improve customer satisfaction by making reliable delivery promises
• Align sales and operations around a single set of priorities
• Reduce chaos and firefighting in the supply chain

What Is Demand Prioritization?

Demand prioritization is the process of ranking and classifying customer demand based on predefined business rules and strategic criteria. It establishes a hierarchy that determines which orders, customers, or market segments receive preferential treatment when supply is constrained.

Key Criteria Used for Demand Prioritization:

1. Customer Classification – Customers may be ranked by strategic importance, volume, profitability, or contractual obligations. For example, a Tier 1 customer with a long-term contract may receive priority over a spot-market buyer.

2. Order Type – Different types of demand may carry different priorities. For instance, safety stock replenishment orders, interplant transfers, contractual commitments, and forecast-driven orders may all be treated differently.

3. Market or Channel – Some markets or distribution channels may be more strategically important. Domestic vs. export, direct vs. distributor, or government vs. commercial orders may have different priority levels.

4. Product Profitability – Orders for higher-margin products may receive priority over lower-margin items.

5. Order Size – Larger orders may receive priority due to economies of scale or revenue impact.

6. Lead Time and Urgency – Rush orders or orders with contractual delivery deadlines may be elevated in priority.

7. Payment Terms and Credit Standing – Customers with better payment histories or prepaid orders may receive preferential allocation.

Demand prioritization is typically established as a company policy and is agreed upon cross-functionally through the Sales and Operations Planning (S&OP) process. It should not be left to ad hoc decisions by individual planners or salespeople.

What Is Order Promising?

Order promising is the process of making reliable delivery commitments to customers based on current and projected supply availability. It answers the fundamental customer question: "When can I get my order?"

Order promising relies on several key tools and concepts:

1. Available-to-Promise (ATP)

ATP is the uncommitted portion of a company's inventory or planned production. It represents the quantity available to promise to new customer orders without conflicting with existing commitments.

How ATP works:
• ATP is calculated from the Master Production Schedule (MPS)
• It considers on-hand inventory, scheduled receipts, and existing customer orders
• ATP is typically calculated at discrete time periods (weekly or daily buckets)
• It tells the order entry person exactly how much product is available to commit to new orders in each time period

ATP Calculation Methods:
• Discrete ATP – Calculated for each MPS period independently. ATP = MPS quantity (or beginning inventory for the first period) minus customer orders already booked before the next MPS receipt.
• Cumulative ATP – Accumulates ATP across periods, allowing earlier surpluses to cover later shortages. This provides a running total of uncommitted supply.
• Cumulative ATP with Look-Ahead – Extends the cumulative approach by looking ahead to future periods to determine if shortages will be resolved, avoiding premature negative signals.

2. Capable-to-Promise (CTP)

CTP goes beyond ATP by considering not just finished goods inventory and the MPS, but also the capacity and material availability needed to produce additional quantities. If ATP shows insufficient supply, CTP checks whether the organization could produce the required quantity by examining:

• Available production capacity
• Raw material and component availability
• Lead times for procurement and manufacturing

CTP essentially performs a real-time planning simulation to determine whether a special or additional production run is feasible to meet the customer's request.

3. Profitable-to-Promise (PTP)

A more advanced concept, PTP evaluates whether fulfilling a particular order is financially worthwhile. It considers:

• The cost of expediting or reallocating resources
• The margin on the order
• The opportunity cost of displacing other orders
• Transportation and logistics costs for special fulfillment

How Demand Prioritization and Order Promising Work Together

These two processes are deeply interconnected:

1. Demand prioritization rules are established through S&OP and management policy. These rules define which customers, orders, or markets get first access to available supply.

2. The MPS is developed based on forecasts, customer orders, and capacity plans. ATP quantities are calculated from the MPS.

3. When a customer order arrives, the order promising system checks ATP (and potentially CTP) to determine if and when the order can be fulfilled.

4. If supply is constrained, the demand prioritization rules determine which orders consume ATP first. High-priority customers may have ATP "reserved" or "allocated" for them, while lower-priority customers may receive later delivery dates or partial fulfillment.

5. Order promising communicates a reliable delivery date to the customer based on the intersection of available supply and the customer's priority level.

Example Scenario:
A manufacturer has 500 units of ATP in Week 3. Three customer orders arrive simultaneously:
• Customer A (Tier 1, contractual): 300 units
• Customer B (Tier 2, regular): 200 units
• Customer C (Tier 3, spot buyer): 150 units

Based on demand prioritization rules, Customer A receives 300 units in Week 3, Customer B receives 200 units in Week 3 (consuming all 500 units of ATP), and Customer C is promised delivery in a later week when additional ATP becomes available, or CTP is used to determine if production can be accelerated.

Key Concepts to Remember for the Exam

• ATP is a communication tool – It bridges sales/customer service and production planning
• ATP is calculated from the MPS, not the forecast. Forecasts drive the MPS, but ATP is based on the MPS quantities and actual customer orders
• Demand prioritization is a policy decision, not an operational one. It should be defined in advance, not decided order-by-order
• Order promising should be realistic – Overpromising destroys customer trust and creates chaos in operations
• ATP is consumed (reduced) as customer orders are booked against it
• CTP extends ATP by considering the ability to produce additional quantities beyond what is currently in the MPS
• The demand management function is responsible for coordinating demand prioritization with supply planning
• Allocation is the practice of reserving portions of available supply for specific customers, channels, or regions based on priority rules
• Demand fences and time fences in the MPS interact with order promising – within the demand time fence, customer orders typically dominate, and changes are carefully controlled

The Role of S&OP in Demand Prioritization

S&OP provides the executive-level forum where demand prioritization policies are established and reviewed. During S&OP meetings:

• Supply-demand imbalances are identified
• Allocation decisions are made for constrained products
• Priority rules are reviewed and updated based on changing business strategy
• Conflicts between sales regions or business units are resolved
• The impact of prioritization decisions on customer service and financial performance is evaluated

Demand Prioritization in Different Environments

• Make-to-Stock (MTS) – Prioritization often focuses on allocation of finished goods inventory among customers or channels. ATP is the primary tool.
• Make-to-Order (MTO) – Prioritization may focus on capacity allocation and production scheduling. CTP becomes more important.
• Assemble-to-Order (ATO) – ATP may be calculated at the component or module level, and prioritization determines which customer configurations are assembled first.
• Engineer-to-Order (ETO) – Prioritization is often project-based, with engineering and design capacity being the key constraint.

Exam Tips: Answering Questions on Demand Prioritization and Order Promising

1. Know the Definitions Precisely
The CPIM exam tests your understanding of specific terminology. Make sure you can clearly distinguish between ATP, CTP, and PTP. Remember that ATP is based on the MPS and uncommitted inventory, while CTP considers additional production capability.

2. Understand ATP Calculations
You may encounter quantitative questions requiring you to calculate ATP. Practice the discrete ATP method:
• For the first period: ATP = On-hand inventory + MPS quantity – Customer orders before next MPS receipt
• For subsequent periods: ATP = MPS quantity – Customer orders booked between this MPS receipt and the next
• Remember: ATP quantities cannot be negative in the discrete method (negative values are set to zero, and unmet demand is addressed through other means). In cumulative methods, negative values may carry forward.

3. Focus on the Policy Aspect
If a question asks about who sets demand priorities or how prioritization rules are established, the answer almost always involves management policy and the S&OP process. Prioritization should never be left to individual discretion at the operational level.

4. Recognize the Link Between Demand Management and the MPS
Questions often test whether you understand that demand prioritization feeds into and interacts with the Master Production Schedule. The MPS provides the supply plan from which ATP is derived. Demand management ensures that customer commitments align with MPS capabilities.

5. Watch for Scenario-Based Questions
The exam frequently presents scenarios where supply is constrained and asks what should happen. Apply this logic:
• First, check if prioritization rules exist
• Then, use ATP to determine what can be promised
• If ATP is insufficient, consider CTP
• Always prioritize based on established business rules, not ad hoc decisions

6. Remember the Cross-Functional Nature
Demand prioritization involves sales, marketing, finance, and operations. If a question presents a conflict between departments about who gets scarce supply, the correct answer typically involves escalating to the S&OP process or following established allocation policies.

7. Distinguish Between Forecast and Customer Orders in ATP
A common exam trap is confusing the role of forecasts and customer orders in ATP calculations. Remember:
• The greater of forecast or customer orders is typically used to determine total demand in each period for MPS planning purposes
• But ATP is calculated against customer orders only (not forecasts), because ATP represents what is available to promise to actual customers
• As customer orders consume the forecast, the forecast is replaced by actual demand

8. Understand Time Fences
Questions may reference how demand prioritization interacts with planning time fences:
• Inside the demand time fence: Only customer orders are considered; changes require high-level approval
• Between the demand and planning time fences: A mix of customer orders and forecasts drives planning
• Beyond the planning time fence: Forecasts dominate
Prioritization decisions are most critical inside the demand time fence, where supply is essentially fixed and allocation decisions have immediate impact.

9. Practice Key Vocabulary
Be comfortable with these related terms:
• Allocation – Reserving supply for specific customers or channels
• Rationing – Distributing limited supply proportionally or by priority
• Consumption – The process by which customer orders replace or "consume" forecast quantities
• Backlog – Orders received but not yet shipped
• Order entry – The point at which customer demand enters the system and ATP is checked
• Demand fence – The time period inside which demand is considered firm

10. Think Strategically, Not Just Tactically
The CPIM exam values answers that reflect strategic thinking. When in doubt, choose answers that:
• Align with overall business strategy
• Use formal processes rather than informal workarounds
• Balance customer service with operational efficiency
• Support cross-functional collaboration
• Protect the integrity of the planning system

Summary

Demand prioritization and order promising are essential processes that bridge customer-facing activities with supply chain planning. Demand prioritization establishes who gets served first when supply is scarce, while order promising determines when and how much can be delivered. Together, they ensure that organizations make intelligent, policy-driven allocation decisions that protect key customer relationships, maximize financial performance, and maintain the credibility of delivery commitments. For the CPIM exam, focus on understanding ATP calculations, the policy-driven nature of prioritization, the role of S&OP, and the distinction between ATP and CTP. Master these concepts, and you will be well-prepared for any exam question on this topic.