5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

  

(https://demand-planning.com)

(https://ibf.org/events/demand-planning-training-online-spring-2020)

TOP DOWN AND BOTTOM UP FORECASTING, ARE THEY FIT FOR

PURPOSE?
MARIUSZ LESIEWICZ (HTTPS://DEMAND-PLANNING.COM/AUTHOR/MARIUSZ/)  JANUARY 30, 2018 

FORECASTING AND PLANNING (HTTPS://DEMAND-PLANNING.COM/CATEGORY/FORECASTING-AND-PLANNING/) 

MODELS & METHODS (HTTPS://DEMAND-PLANNING.COM/CATEGORY/ANALYTICS/MODELS-AND-METHODS/)

c have their limitations.

What comes to mind when you think about the Demand Planning (https://demand-
planning.com/2018/01/22/the-demand-planner-of-the-future/) role? Sophisticated
econometric models, highly analytical work, and number crunching? This was my rst
impression when I saw an advertisement for an internship in a Demand Planning department.
The reality turned out to be a little di erent…

How E ective Is Your Company’s

Forecasting Process?
What struck me when I started my rst job in a Demand Planning team was that you learn a lot
about reports and templates, and read a lot of PowerPoint decks, but you don’t learn much about
how to actually build a good forecast for your portfolio of products. I started to dig a little deeper
into how to improve my forecasts, and what occurred to me was that every one of my colleagues
had a di erent approach to forecasting. The goal of this article is to initiate a discussion on the
di erent ways of working in Demand Planning, and to discuss bottom up and top down
This website uses cookies to improve your experience. We'll assume you're ok with this, but
forecasting, and why we need to think beyond these two methodologies.
you can opt-out if you wish. Cookie settings () ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 1/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

The base forecast generated by statistical models is less biased as it is derived from the
performance of each product.

Bottom Up Forecasting
The fundamental component of the bottom up forecasting process is statistics (usually through
SAP APO software). The process is organized with a baseline forecast on the SKU level
(https://demand-planning.com/2018/01/12/sku-rationlization/) generated by a centralized
team, and a nal forecast that combines statistics with market intelligence from local Demand
Planners working in particular markets. The monthly process consists of the following:

Statistical models are recalculated with data from the recently nished month.
Monthly calls between the local Demand Planner and the Central Demand Planner to discuss
recent forecast changes, top sales outliers and major root causes of forecast errors.
The base forecast Demand Planner meets with the Sales team to add market knowledge.
Creation of a separate forecast for New Product Development (https://demand-
planning.com/2018/01/08/forecasting-new-products/) and New Product implementation
provided by Marketing.
Presentation of nal forecast gures to upper management to achieve o cial sign o on
forecast gures (re ected in USD value, not volume).
Develop Operational Sales Plan with monthly update to aid product availability forecast.

Sales teams members must share responsibility for forecast accuracy. That means putting
narrow functional objectives to one side.

Top Down Forecasting

The top down forecasting process relies strongly on Sales engagement (https://demand-
planning.com/2017/11/06/why-sales-must-work-together-with-demand-planning/) and is more
simpli ed. This process consists of:

Monthly forecast revision with Sales team representatives (which is an additional function
Thisthe
within website
wider uses
Salescookies to improve
structure) your
who bring experience.
projected salesWe'll
guresassume
at theyou're ok family
product with this, but
level.
The Demandyou
Planner challenges
can opt-out those
if you wish. gures and its
Cookie major()assumptions.
settings ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 2/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

The nal forecast gures form the basis of the Operational Sales Plan for the company, which
is signed o by management (working to the one number concept).
The Demand Planner forecasts a mix of products, arriving at a total gure for the product
family as agreed with Sales.

The base for forecasting the product mix is historical sales split within product family. The split is
modi ed to include all latest information like new listing and delisting at customers’ stores,
promotions (https://demand-planning.com/2015/11/13/promotional-forecasting-a-new-smart-
approach/), Marketing support, New Product Developments and cannibalization.

In both processes, Sales teams have very different objectives to us as Demand Planners.

Pros And Cons Of Each Process

In both methods, the role of the Demand Planner and its impact on nal gures is di erent. The
advantage of the bottom up approach is higher autonomy for the Demand Planner and greater
control. The base forecast generated by statistical models is less biased as it is derived from the
performance of each product. On the other hand, higher engagement with Sales in the top down
forecast process gives the bene t of inputting valuable market intelligence.

In both processes, Sales teams have very di erent objectives to us as Demand Planners. In
bottom up forecasting, they tend to increase volumes to secure the stock to avoid missing out on
potential sales, which leaves the company at risk of holding excess inventory. Sales also declare
numbers only in dollars and on a brand level. Once this Sales Plan is signed o by management,
these numbers form the basis of the Operational Sales Plan, meaning the Sales team’s
conservative bias a ects the whole organization.

In top down forecasting, as the nal gures become the o cial Sales Plan, Sales try to lower
them as it is always better for them to set low targets and outperform them, rather than set a
realistic range. For top down forecasting it is important, in my opinion, that Sales team members
participating in the forecasting process are sharing responsibility for forecast accuracy. That
means putting narrow functional objectives to one side.

This website uses cookies to improve your experience. We'll assume you're ok with this, but

you can opt-out if you wish. Cookie settings () ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 3/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

These Two Forecasting

Methodologies Place Limitations on
Demand Planning
I cannot help but feel these two approaches place limitations on the Demand Planner function
and overall forecast accuracy. There is a need of wider knowledge regarding di erent ways to
work in the Demand Planning role and di erent methodologies, especially for young people
entering this profession. Such knowledge should cover the topics Demand Planners face day to
day like incorporating input from Sales regarding a promo event (https://demand-
planning.com/2015/11/13/promotional-forecasting-a-new-smart-approach/) (i.e how to
translate information into volumes), how to structure the forecast review meeting, the best tools
for forecast analysis, and how to challenge the Commercial team using your statistical output.

B O T T O M U P F O R E C A S T I N G ( H T T P S : // D E M A N D - P L A N N I N G . C O M / T A G / B O T T O M - U P - F O R E C A S T I N G / )

T O P D O W N F O R E C A S T I N G ( H T T P S : // D E M A N D - P L A N N I N G . C O M / T A G / T O P - D O W N - F O R E C A S T I N G / )

(https://ibf.org/events/demand-planning-training-online-spring-2020/?utm_source=Demand-
planning.com&utm_medium=blog%20banner&utm_campaign=ONLINE_SPRING_2020)

PREVIOUS ARTICLE (HTTPS://DEMAND-PLANNING.COM/2018/01/29/HOW-TO-MAKE-YOUR-OWN-

 POWERFUL-MACHINE-LEARNING-FORECASTING-MODELS-FOR-FREE-WITHOUT-CODING/)

HOW TO USE MICROSOFT AZURE (HTTPS://DEMAND-

PLANNING.COM/2018/01/29/HOW-TO-MAKE-YOUR-OWN-POWERFUL-
MACHINE-LEARNING-FORECASTING-MODELS-FOR-FREE-WITHOUT-
C O experience.
This website uses cookies to improve your DING/) We'll assume you're ok with this, but
NEXT ARTICLE (HTTPS://DEMAND-PLANNING.COM/2018/02/05/5-MAJOR-BENEFITS-OF-SALES-AND-
you can opt-out if you wish.
OPERATIONS-PLANNING/) ACCEPT () Cookie settings ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 4/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

5 MAJOR BENEFITS OF S&OP FOR YOUR COMPANY, AND HOW TO

ACHIEVE THEM (HTTPS://DEMAND-PLANNING.COM/2018/02/05/5-MAJOR-
BENEFITS-OF-SALES-AND-OPERATIONS-PLANNING/)

MARIUSZ LESIEWICZ (HTTPS://DEMAND-

PLANNING.COM/AUTHOR/MARIUSZ/)

Mairusz started his career as a demand planning intern at Johnson & Johnson before
assuming the role of Supply Chain Analyst, then Demand Planning Analyst, and then
Demand Planner. He spent some time as Demand Planner for the chocolate category at
Mondelēz International before becoming a Senior Supply Chain & Operations Consultant at
EY. Mariusz holds a Masters degree in Accounting and Finance from SGH Warsaw School of
Economics, and his main interest lies in the methodology of forecasting and innovative
approaches to demand planning.

RELATED POSTS

 

(https:/added
planning
value /demand
com/2018/02/12/what
analysis/) is forecast (https://demand
supply
planning chain
com/2011/04/14/transforming
at electrocomponents
with forecasting and
plc/)
demand
the
HOW TO USE FORECAST VALUE ADDED ANALYSIS TRANSFORMING THE SUPPLY CHAIN WITH
(HTTPS://DEMAND-PLANNING.COM/2018/02/12/WHAT- FORECASTING AND DEMAND PLANNING AT
IS-FORECAST-VALUE-ADDED-ANALYSIS/) ELECTROCOMPONENTS PLC (HTTPS://DEMAND-
ERIC WILSON, CPF (HTTPS://DEMAND- PLANNING.COM/2011/04/14/TRANSFORMING-THE-
SUPPLY-CHAIN-WITH-FORECASTING-AND-DEMAND
PLANNING.COM/AUTHOR/ERICWILSON/)  FEBRUARY
PLANNING-AT-ELECTROCOMPONENTS-PLC/)
12, 2018
This website uses cookies to improve your experience.
ANDREW We'll
L E W Iassume
S ( H T T P S you're
: / / D E M Aok
N Dwith
- this, but
PLANNING.COM/AUTHOR/ANDREWLEWIS/)  APRIL
you can opt-out if you wish. Cookie
2 0 1settings
1 () ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 5/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

Load Comments

S U BS CRIB E T O O U R N E W SLE T T E R

Get the latest Business Forecasting and Sales & Operations Planning news and insight from
industry leaders. [contact-form-7 id="529"]

IBF O N D E M AN D P O D CAST

(https://www.youtube.com/user/DemandPlanning/)

[bar id="7434"]

UPDATE: COVID-19 USA & NEW YORK ROLLING FORECASTS

(HTTPS://DEMAND-PLANNING.COM/2020/05/05/UPDATE-COVID-19-USA-
NEW-YORK-ROLLING-FORECASTS/)
This website uses cookies to improve your
MAYexperience.
5, 2020 We'll assume you're ok with this, but

you can opt-out if you wish. Cookie settings () ACCEPT ()

planning com/2020/05/05/update covid 19 usa(https:/ /demand-
new york rolling forecasts/)
https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 6/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

(https://demand-planning.com/2020/05/05/update-covid-19-usa-new-york-rolling-
forecasts/)

COVID-19 USA & NEW YORK ROLLING FORECASTS (HTTPS://DEMAND-

PLANNING.COM/2020/05/01/CORONAVIRUS-FORECASTS-2/)
MAY 1, 2020

planning com/2020/05/01/coronavirus forecasts(https:/

2/) /demand-
(https://demand-planning.com/2020/05/01/coronavirus-forecasts-2/)

EFFECTIVE DEMAND PLANNING IS THE DIFFERENCE BETWEEN SURVIVAL &

INSOLVENCY (HTTPS://DEMAND-PLANNING.COM/2020/04/27/REPORT-
EFFECTIVE-DEMAND-PLANNING-IS-THE-DIFFERENCE-BETWEEN-SURVIVAL-
INSOLVENCY/)
APRIL 27, 2020

survival insolvency/)
planning (https:/
com/2020/04/27/report e ective demand /demand-
planning is the di erence between
(https://demand-planning.com/2020/04/27/report-e ective-demand-planning-is-the-
di erence-between-survival-insolvency/)

AB O U T IBF

The Institute of Business Forecasting & Planning (IBF)-est. 1982, is a membership

organization recognized worldwide for fostering the growth of Demand Planning,
Forecasting, and Sales & Operations Planning (S&OP), and the careers of those in the eld.

S U B SC
This website uses cookies RI B E your
to improve T O experience.
O U R N EWe'll
W SLE T T Eyou're
assume R ok with this, but

you can opt-out if you wish. Cookie settings () ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 7/8
5/5/2020 Top Down And Bottom Up Forecasting Encourage Forecast Bias

[contact-form-7 id="530"]

FO LLO W U S O N SO C IAL M E D IA

(https://www.facebook.com/DemandPlanning)
(https://www.linkedin.com/groups/56631)
(https://www.youtube.com/user/Dema

(HTTPS://DEMAND-PLANNING.COM)

HOME (HTTPS://DEMAND-PLANNING.COM/)
/ ABOUT US (HTTPS://DEMAND-PLANNING.COM/ABOUT-US/)
/ ASK DR. JAIN (HTTPS://DEMAND-PLANNING.COM/ASK-DR-JAIN/)
/ CONTACT US (HTTPS://DEMAND-PLANNING.COM/CONTACT-PAGE/)
/ MEDIA KIT (HTTPS://DEMAND-PLANNING.COM/MEDIA-KIT/)

© 2020 INSTITUTE OF BUSINESS FORECASTING & PLANNING. ALL RIGHTS RESERVED.

This website uses cookies to improve your experience. We'll assume you're ok with this, but

you can opt-out if you wish. Cookie settings () ACCEPT ()

https://demand-planning.com/2018/01/30/top-down-vs-bottom-up-forecasting/ 8/8