What Is Forecast Hierarchy and How Does Seasonality Tie Into It?
When you’re at the helm of an inventory-based business, you know just how much is uncertain, particularly when it comes to consumer demand. As this demand fluctuates due to everything from the weather to holidays, your warehouse needs to be ready for changes in consumer habits, to be prepared with the proper quantity of stock at the right moment. And while forecasting alone is a powerful tool for predicting how much inventory you’ll need at any given time, it’s even more useful when practiced using forecast hierarchy, and when seasonality is taken into consideration.
The State of Warehouses Today
To understand what forecast hierarchy is and why it matters, it’s important to touch on just how unpredictable and volatile inventory-based businesses are today. The $15.85 billion dollar global supply chain market is operating in the face of tumultuous global conditions. Supply chain disruptions have become “the norm,” and there are many consumer trends that fuel supply and demand. For example, holidays and the weather lead to different shopping habits, and can lead to things like weather-related delays, and holiday-related surges. This becomes even more critical when we consider the fact that warehouses are facing a labor crisis across the board.
Because of these volatile fluctuations, warehouses need forecasts which are built to work in these conditions.
The Solution to These Issues? Forecasting
What this all means is that for an inventory-based business to operate at its peak effectiveness, it’s vital for warehouse leadership to accurately predict the amount of inventory that will be needed at any given time, regardless of the variables at play. This is typically done through demand forecasting, which (as the name suggests) ensures you can meet all of the demands of your customers, without locking up funds in excessive inventory.
But when it comes to forecasting, there are diverse ways you can execute forecasts, to accurately anticipate demand and plan inventory at different levels. This is called forecast hierarchy.
Understanding the Basic Forecasting Strategies
When executing forecasts for your warehouse, there are a few main forecasting strategies that are often used, which tie into forecast hierarchy. Here are the main three approaches:
- Top-down forecasting: This forecasting approach starts with the broadest factors, such as market research data, and the largest product categories or families (think: bicycles). The benefit of top-down forecasting is that it is often quicker to collect data, and it can supply insights into big picture demand and needs, offering perspective into the business on a high level. The downsides is that it can often miss granular information, leading to issues like overstocking and understocking.
- Bottom-up forecasting: This forecasting approach starts from the bottom of the inventory chain, using the smallest subsets of individual items (in this example, it might be dirt bikes, children’s bikes, electric bikes, and mountain bikes). Bottom-up forecasting offers a detailed look at future needs and requires employee involvement at more levels in an organization, leading to a better-informed forecast. But it can take a lot more time to put together, and you are left with a laser-focused picture that might miss big-picture needs.
- Middle out forecasting: This forecasting approach takes one of the middle tiers of the product hierachy and executes the forecasts from here (it might be a line of bicycles, for example). It can offer a more detailed picture than top-down forecasting and doesn’t consume as much resources as bottom-up forecasting. But with middle out forecasting, the data can become murky, leading to confusion over which information is most critical.
Forecast Hierarchy Breaks It All Down
While the above strategies are common, forecasting your warehouse operations can also be broken down by various levels of forecast hierarchy.
For long-term forecasts at the elevated level, you can use strategic forecasting, which might include forecasts for large product categories, and consider market factors, customer preferences, and long-term business goals. This level of the forecast hierarchy is excellent for high-level decisions such as resource allocation and overall warehouse strategy.
For medium-term forecasts at a more detailed level, you can use tactical level forecasting. This might include specific product lines, or individual SKUs. This forecasting level can support inventory planning, procurement, and helps determine optimal inventory levels and reorder points.
For the most short-term and nuanced forecasting, you’ll use the operational level of forecasting. These forecasts focus on the day-to-day operations with the warehouse and are performed on the bottommost level of the production line, such as by individual items, or product variations. This sort of forecasting can address immediate demand fluctuations.
Forecast Hierarchy and Seasonality
Seasonality is a critical element of proper supply chain management and planning, and it has a vast impact on warehouse operations. Seasonality refers to recurring patterns or fluctuations in the demand for products, which occur during certain periods.
Seasonality is influenced by many factors, including holidays, weather conditions, social occurrences, and general customer behavior. By understanding the seasonality of your business, you can most accurately forecast your needs. This means that warehouse managers can make data-informed decisions about things such as inventory management, resource allocation, and operational planning.
Here are a few reasons why seasonality should be considered and incorporated when addressing forecast hierarchy:
- Most accurate forecasts: Considering seasonality and fluctuations can allow warehouses to improve the accuracy of demand forecasts. Historical data can be analyzed to determine recurring patterns and trends, leading to more precise predictions of customer demand during certain seasons or events.
- Better inventory management: When seasonality is incorporated into forecast hierarchy, warehouses can operate at their optimal inventory levels. That’s because warehouse leaders can align their inventory levels with known seasonal demand fluctuations. They can avoid stockouts during times of increased demand, while minimizing excessive inventory.
- Optimized resource planning: Seasonality impacts many elements of warehouse operations, including labor, equipment, and storage space. By taking a seasonality-informed approach to forecast hierarchy, warehouse managers can proactively plan how to allocate resources, beyond stock needs.
Seasonality at Each Forecast Hierarchy Level
Seasonality can be incorporated into each level of the forecast hierarchy. Here are some examples as to how:
- Strategic level: At the strategic level, warehouses can use an understanding of seasonality for long-term forecasting, and alignment with larger trends. Warehouse managers can analyze historical data to look for patterns, spikes, and dips. They can also collaborate with suppliers and other stakeholders to ensure that inventory is sufficiently matching the needs. Market trends and conditions, consumer behavior, and industry forecasts can also help inform the understanding of seasonal demand.
- Tactical level: At this middle level, warehouses use medium-term forecasting to optimize inventory levels. Managers might forecast demand for certain product categories or SKUs during set periods. Promotional planning and marketing campaigns can also be used to forecast seasonal demand.
- Operational level: This short-term forecasting level includes real-time demand monitoring, where warehousesadjust inventory on an immediate basis (daily, or perhaps weekly). Because of these short-term forecasts, warehouses can make quick decisions about stock, ordering, and fulfillment strategies. Understanding seasonality at this level requires excellent communication across the warehouse and with other stakeholders, to ensure all necessary information is being relayed and considered.
Tips for Using Seasonality to Inform Forecast Hierarchy
To effectively use seasonality to inform forecast hierarchy, here are a few tips to keep in mind:
- Know what trends are shaping your consumers
From winter storms to summer holidays, there are many trends that are shaping the seasonality of your consumers. Some of these trends will be recurring, but some might be new, and can be influenced by social conditions. Have an excellent grasp on your warehouses’ seasonal trends by analyzing historical data, and looking for spikes, dips, and demand during specific time frames.
- Collaborate with stakeholders
Accurately integrating seasonality into forecast hierarchy requires warehouse managers to collaborate with stakeholders such as suppliers, manufacturers, and other partners. This allows for comprehensive alignment between the seasonally informed forecasts and the reality of the warehouse operations.
- Utilize advanced forecasting tools and technologies
A warehouse that lacks proper technological infrastructure is going to have a challenging time taking advantage of the knowledge that seasonality provides. But by using the leading warehouse operations tools and technologies, you can receive key insights into what you’re going to sell, what you need to buy, what isn’t shipped or sold, and what you’re out of. You also get real-time updates, access to advanced forecasting models, and immediate distillation of key takeaways.
- Understand the pros and cons of the forecast hierarchy method you select
Each segment of forecast hierarchy serves a different purpose, and might supply you with different insights, as well as with different blind spots. Be sure to select a level of forecast hierarchy that will best serve your needs, avoid relying on just one forecast model, and reconcile your various forecasts to produce the most accurate picture possible.
Have Your Mastered Seasonality and Forecast Hierarchy?
If you’re looking for an all-in-one tool that helps you leverage seasonal insights in your forecasting, we’ve got you covered. StockIQ has comprehensive demand forecasting and inventory analytics tools which can help you expertly manage your warehouse operations, at every level of the forecast hierarchy. Contact us today to learn more.