Forecast Approaches

A. Top-Down Approach

Plant Distribution Centre

Field
Field Field Field
Distribution
Distribution Distribution Distribution
Centre # 2
Centre # 1 Centre #3 Centre #4
Forecast
Forecast Forecast Forecast
3000 units
4000 units 2000 units 1000 units

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• Assume the firm has an aggregate monthly
forecast for the entire country as 10,000 units
and it use four distribution centres to service
the demand with a historical split of 40, 30, 20,
and 10 per cent respectively.
• Forecasts for individual distribution centres will
be projected to be 4,000, 3000, 2,000 and 1,000
respectively.
• In top-down approach a national level SKU
forecast is developed and then the forecasted
volume is spread across locations on the basis
of historical sales pattern.
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B. Bottom-up Approach
Decentralized approach since each distribution
centre forecast is developed independently.
Results into more accurate forecast as it tracks
and considers demand fluctuations within
specific markets.
Requires more detailed record keeping and is
more difficult to incorporate demand factors
such as impact of promotion.
Trade-off the detail tracking of bottom-up
approach with data manipulation ease of top-
down approach.
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 Components of Collaborative
Forecasting
Forecast Forecast Process Forecast
database Users

Forecast Administration Finance

Orders Marketing
Sales
History Forecast Production
Forecast
Tactics Technique
Support Logistics
System

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A. Forecast data base keeps information about
• Orders
• Order history
• Tactics used to obtain orders such as promotions,
schemes, special promotional programmes.
• State of economy and competitive actions.
B. Forecast process integrates forecast techniques,
support system and administration.
• Two prominently used forecasting techniques are
time series and correlation modelling.
• Forecast support system is the capability to gather
and analyze data, evaluate impact of promotion,
develop forecast and communicate to the relevant
personnel.
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 Issues addressed by Forecast
Administration
• Who is responsible for developing the forecast?
• How is forecast accuracy and performance measured?
• How does forecast performance affect job
performance, evaluation and rewards?
• Do the forecast analysts understand the impact of
forecasting on logistics operations?
• Do they understand the differences in various
forecasting techniques?