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
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.
The Advantages of Top Down Forecasting
Top down forecasting offers several advantages.
- It often makes it faster to collect and put together the data needed for forecasting purposes.
- Top down forecasting does not require as much data as other strategies.
- It offers a bigpicture look at current demand and need, which can make it easier to create plans for the entire business
The Disadvantages of Top Down Forecasting
While top-down forecasting does have some advantages, it does offer a few disadvantages that you must take into consideration.
- It offers only a generalized look at the market, which means that it may be missing essential information.
- It may open the door to some bias, especially bias based on past trends.
- Top-down forecasting often leads to overstocking of some key items. It may also lead to understocking of items if demand spikes unexpectedly.
Bottom Up Forecasting
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.
The Advantages of Bottom Up Forecasting
Bottom up forecasting offers several important advantages.
- It offers a more detailed look at future demand needs.
- It incorporates data from more sources for a more accurate look at future inventory expectations.
- Bottom up forecasting typically involves employees at more levels of the organization, which can mean greater overall knowledge and understanding of potential inventory needs.
The Disadvantages of Bottom Up Forecasting
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.
- Bottom up forecasting has an elevated level of employee involvement, which means that it can be more difficult to determine where individual factors may have come from or changed.
- It takes a great deal more time to put together a bottom up forecast, and it can be more expensive.
- You may have a smaller picture of your overall inventory forecast, which can make it more difficult to keep your eyes on that big-picture approach.
Middle Out Forecasting
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.
The Advantages of Middle Out Forecasting
This hybrid approach can often provide greater overall insight while cutting costs and speeding up the forecasting process.
- It offers a more detailed, accurate picture than top down forecasting.
- It takes into consideration employee knowledge and other real-world information.
- It doesn’t cost as much as bottom up forecasting, which may require an in-depth review of more data.
The Disadvantages of Middle Out Forecasting
Middle out forecasting is an imperfect model. While it can offer key insights, it can have some disadvantages.
- Middle out forecasting may muddy the waters and make it more difficult to tell exactly what information is important, which can lead to unexpected inaccuracies.
- It does not offer the same degree of information as bottom up forecasting.
- It may be more expensive and time-consuming than top down forecasting.
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.
