Top-down forecasting? Bottom-up forecasting? How is someone with an eCommerce site supposed to know which one to use?
There are specific instances when one is better than the other. Let’s examine which situations call for bottom-up forecasting, and which ones require top-down.
Bottom-up forecasting determines the trends and forecasts for each individual variant and then adds up the demand for each of those variants. It takes the very bottom layer and the most granular look at the information and then adds up all the trends.
Here the forecast for SKU-1 is calculated, then the forecast is calculated for SKU-2, and so on. After all of these are forecast, the aggregate demand is your total bottom-up forecast. This is appropriate when SKU-1 and SKU-2 have different forecasts due to seasonality or other attributes.
By contrast, top-down looks at the same category (or vendor, product, or other grouping). Say your site sells clothing. One particular dress contributed 2% of the revenue in the dress category in the past. A top-down forecast means that because it has been contributing 2% to the category, you will forecast it as continuing to contribute 2% to all dresses sold.
Past performance indicates future performance; however, it does not mean, for example, if you sold 500 dresses in the past that you are going to continue to sell 500 units. Top-down forecasting follows the trends of the categories (in this case, dresses). You normally don’t sell as many dresses in the winter, so if you are looking at that 2% of category revenue, it is 2% of a smaller number.
Top-down is good for products that are seasonal but that do not have a long of sales history. This is especially applicable to the fashion industry where new styles roll out all the time, but you didn’t have those items in stock a year ago. To forecast demand for a seasonal item like a dress, you know how the dress’s category performs, so with a little bit of sales data for that particular dress, you can continue to look at replenishment needs moving forward.
For Inventory Planner Users:
Account-wide top-down forecasting
Just a few clicks in Inventory Planner will allow you to use top-down forecasting for your eCommerce site. To enable top-down forecasting store-wide, go to Account > Settings