Top-Down or Bottom-Up: Which Is The Best Approach To Forecasting?

TOP-DOWN OR BOTTOM-UP: WHICH IS THE BEST APPROACH TO FORECASTING? By: Teresa P. Gordon, John S. Morris and Byron J. Dangerfield Bottom-up approach to forecasting yields better forecasts than the top down when forecasts are statistically generated ... top-down approach works well when SKUs within a family are of equal size ... carefully specified statistical models give better forecasts than those judgmentally developed. Firms often market families of items that are closely related in function, styling, and design. For example, a manufacturer of irrigation equipment may offer several families of irrigation equipment including impact sprinklers, rotator sprinklers, and gun sprinklers. The impact sprinkler family might then consist of two individual stock keeping units (SKUs) such as low angle and high angle impact sprinklers. Two general approaches have been suggested for developing forecasts for individual items in a family. One approach might be referred to as “top down” (TD). In this approach, the family data are used to develop a family forecast which is then disaggregated into individual items based on their historical fraction of sales. The alternative employs a “bottom ...