Effective Business Forecasting: Bridging the Gap Between Top-Down and Bottom-Up Approaches

Effective Business Forecasting: Bridging the Gap Between Top-Down and Bottom-Up Approaches

In the ongoing debate between top-down and bottom-up forecasting, the goal is to create a practical and effective forecast that helps your business improve its decision-making, be it in labour, space, or resource management.

The importance and granularity of forecasting vary significantly depending on the industry, organisation size, aim and complexity. Often conducted top-down and in departmental silos, it’s crucial to ensure that forecasts are purposeful and interconnected.

Common Challenges

You might receive a forecast from the sales team, corporate, or, if you’re a 3PL, the customer. Typically, these forecasts are top-down, finance-led, and influenced by shareholder promises. This often results in forecasts that are not actionable for operations professionals, who deal in pallets, cases, units, hours, and/or full-time equivalents (FTEs).

Conversely, bottom-up forecasts are created by individuals who understand their function’s needs and plan with data, without the pressure to make overly optimistic growth predictions. However, these forecasts may not align with the top-line forecasts provided.

Operational Frustrations

  • “We have a forecast from the business, but we don’t use it because it’s unreliable. We create our own.”
  • “The forecast is in cash terms, not in supply chain language.”
  • “We are not informed about promotions in advance. The digital team focuses on traffic, the trading team on conversions, but logistics is left out.”
  • “Old stock remains in the warehouse for years, gathering dust.”
  • “We are not informed about new product launches in time to prepare adequately.”

Addressing Top-Down Forecasting Issues

Top-down forecasts often lead to inaccurate volume predictions, impacting productivity and operational costs. This can result in last-minute staffing adjustments, causing frustration and planning challenges. However, you can break this cycle and foster a collaborative approach by adopting purpose-driven forecasting.

The Reality of Forecasting

All forecasts are inherently flawed; the key is to understand and minimise errors, as significant forecast errors affect productivity and operational costs. Addressing this issue can be daunting, especially amidst the monthly trading cycle and day-to-day operational crises.

Modern Supply Chain Challenges

Since the 2008 recession, supply chains have been optimised for efficiency rather than resilience. This fragility means that even minor volume spikes can cause disruptions. Companies like Amazon have set high benchmarks for delivery times, increasing pressure on supply chains.

How to reconcile the top down and bottom-up forecasts?

A balanced approach between top-down and bottom-up forecasting can lead to better labour, space, and resource planning. While this may seem contrary to the idea of a single version of the truth, it can add value if different forecasts inform relatively independent decisions. The key is to identify each forecast’s assumptions, such as changes in order value run rate, average line value, order fluctuations, and seasonal impacts on output per hour. When those assumptions are identified, highlighting the impacts on the forecast to all functions will help reach a consensus.

Case Study: National Supermarket Chain

We developed a seasonal forecast using Holt-Winters at the product category/site level, rather than aggregating SKU/store/week forecasts. This bespoke forecast reduced volatility, allowing for more accurate demand predictions and better resource management. This approach improved resilience while reducing labour costs.

Additional Strategy:

Incentivising Stock Management: Excess stock often sits in warehouses for years, incurring costs. Companies should implement product life-cycle processes to manage stock effectively, including capturing trigger points for SKU decline, discontinuing items, and promoting inventory depletion. Financial reporting can assess NPI investments and incentivise better buyer decisions. The final stage should involve writing off SKUs and selecting the best exit route, such as brokerage, charity, or disposal.

Conclusion

As companies face unprecedented challenges, agile and resilient responses are essential. accurate forecasting will help businesses navigate future obstacles and thrive.

You can find more information about our Demand Forecasting and Inventory services here or contact us here.

 

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