When it comes to stock and inventory management, there are a number of common strategies that can help you forecast demand and maintain the right level of inventory across your organization. Using the right strategy is critical. However, it can be difficult for many business owners and managers to determine the strategy that’s right for their business.
Is a top down, middle out, or bottom-up approach the right one for your business? Check out each one and how it can benefit you.
Top down forecasting is a simple, broad approach that looks at a variety of factors to determine future demand. First, the business will collect market research data, which it will use to set general trends and revenue targets based on both past expectations and other factors in the market. Members of the central planning team will offer any information they might have that could conflict with the available market research: for example, potential changes in trends, or predictions about future changes in the market. Then, demand planners will use that information to forecast demand at the product level.
Top down forecasting offers several advantages.
While top-down forecasting does have some advantages, it does offer a few disadvantages that you must take into consideration.
Bottom up forecasting starts at the bottom of the inventory ladder and takes a comprehensive look at individual items and any available forecasting data. It uses information from central demand planning teams, who may use statistical models to clearly identify future inventory needs, as well as information from local demand planners, who may have more localized information. Bottom up forecasters then add in market knowledge directly from the sales team, who work on the front lines with customers and may have a more accurate view of exactly what changes the market will make.
Finally, demand planners will use that data to create forecasts for how those products will perform in the future. This data-based approach is seen by many as the future of inventory forecasting, since it offers a highly accurate view of what future inventory needs might look like.
Bottom up forecasting involves multiple rounds of back and forth between demand planners, marketing professionals, and salespeople, since it takes a more extensive look at all factors that could influence inventory in the future.
Bottom up forecasting offers several important advantages.
While bottom up forecasting offers a number of key advantages, including a more accurate overall forecast, it may also offer several disadvantages that must be taken into consideration as you decide which method works best for your business.
Middle out forecasting may depend on the specific model you want to use and how you want to forecast demand across your organization. Often, it breaks down inventory forecasting into the elements that are most important to a specific organization. For example, it might look at a specific product line, or type of product, to help provide greater overall insight into how that line is performing.
Middle out forecasting is often a hybrid approach. It looks at the broad elements that can impact demand, including past performance, as well as more detailed current elements that may have an influence on actual inventory and need across the business. Then, it breaks down some of the more specific elements and involves localized experts and sales team members to produce a more comprehensive look at exactly what the demand for specific items might look like.
This hybrid approach can often provide greater overall insight while cutting costs and speeding up the forecasting process.
Middle out forecasting is an imperfect model. While it can offer key insights, it can have some disadvantages.
Choosing the right inventory forecasting strategy for your business can be critical. At Stock IQ, we offer the tools you need to assess the data you have on hand more accurately. We’re here to help you forecast your future inventory needs, including data like seasonal demand, holiday challenges, and product lifecycles with more confidence. Contact us today to learn more about how we can help you manage your inventory more effectively.