Forecasting is an essential tool for stock and inventory management, which helps businesses accurately anticipate expected demand and revenue. Whether you’re planning your next budget, projecting sales growth, or preparing for market shifts, forecasting allows your business to make informed decisions about your strategies and resources. However, there are several common forecasting methods to choose from, and it’s important to select the one that suits your needs. The three most notable forecasting approaches are top-down, middle-out, and bottom-up.
Sales forecasting is critical because it drives operational excellence: studies show that high-performing sales teams are 1.5 times more likely to base forecasts on data-driven insights. But it’s important to choose the right forecasting method to meet your needs.
So, how do they differ, and when is the right time to choose each one? This article will explore top-down, middle-out, and bottom-up forecasting, and break down everything you need to know.
Top-Down Forecasting
Top-down forecasting is a method that starts with a high-level view of the market or industry and narrows down the focus to estimate specific outcomes for your business.
First, the business will collect macro-level data (such as 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. Then, the organization will offer any information it 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’s often a speedier forecasting method.
- Top-down forecasting does not require as much data as other strategies.
- It offers a big-picture look at current demand and needs, 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 begins at the bottom of the inventory ladder, starting with granular data points. It uses information from sales teams, stores, or individual products to build upward and create a comprehensive forecast. Bottom-up forecasters then add in relevant knowledge directly from internal teams, which might know things like the exact number of products sold or amount of stores in operations. Finally, these smaller forecasts are added together to form an overall projection.
Bottom-up forecasting typically 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 highly 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 several key advantages, including a more accurate overall forecast, it may also offer several disadvantages that must be taken into consideration:
- Bottom-up forecasting has an elevated level of 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 takes a balanced approach to forecasting by combining elements of both of the previous methods. It focuses on mid-level data (such as regional sales or product categories), and uses this to forecast both higher-level outcomes and finer details.
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
While middle-out forecasting 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.
How to Choose the Right Forecasting Approach for Your Needs
Now that you’ve learned about top-down, middle-out, and bottom-up forecasting methods, how can you know which one is right for your needs? Choosing the right forecasting approach depends on several factors, such as:
1. What data do you have available?
The type of data you have available plays a big role in which forecasting method might be best for you to use. For example, if you have data with limited detail (say, you’re entering a new market with little historical information), top-down might be a good starting point. But if you have robust, granular data about individual products, bottom-up forecasting can likely provide a more detailed and accurate picture.
2. How complex is your business or market?
For simple or stable businesses with predictable growth, top-down forecasting might be enough. For example, if your industry has a steady demand for mature products. However, if your business is complex or operating in a fast-changing market, bottom-up forecasting provides detailed insights that can help you spot nuances.
3. How much time and resources do you have?
Top-down forecasting is notably quicker and requires less effort than the other methods, making it ideal when time and resources are limited. Bottom-up forecasting typically takes more time and resources, as you’ll need to gather and analyze detailed data from across your organization or market. But while it’s more labor-intensive, it can yield higher accuracy.
4. What level of accuracy do you need?
Speaking of accuracy, it’s important to realize that the different forecasting methods typically yield different levels of accuracy. If a broad, high-level estimate is suitable for your needs, top-down forecasting will likely be sufficient. But if accuracy is critical (particularly for something like budgeting or resource allocation), bottom-up might be the best method. Or, if you want to achieve a balance between accuracy and efficiency, then middle-out might be suitable for your needs.
Level-Up Your Forecasting with StockIQ
When it comes to top-down, middle-out, and bottom-up forecasting, each method has its own strengths, weaknesses, and use cases. Choosing the right method depends on your unique situation, resources, and business needs. Whatever method you choose, if you’re ready to take your forecasting to the next level, StockIQ is here to help.
StockIQ is a supply chain planning suite targeted at manufacturers and distributors that includes many advanced forecasting features, sophisticated algorithms, and useful inventory planning dashboards.
Interested in seeing how StockIQ can help enhance your forecasting? Contact us today or request a StockIQ demo.
