Forecast Pro Multiple Level
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Transcript of Forecast Pro Multiple Level
Considerations for Effectively Forecasting a Product Hierarchy
Presented byEric StellwagenVice President & CofounderBusiness Forecast Systems, [email protected]
Business Forecast Systems, Inc.68 Leonard StreetBelmont, MA 02478 USA(617) 484-5050www.forecastpro.com
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Eric Stellwagen
Vice President, CEO & Cofounder ofBusiness Forecast Systems, Inc.
Coauthor of Forecast Pro product line.
Over 25 years in forecasting.
Currently serving on the board of directors of the International Institute of Forecasters and on the practitioner advisory board of Foresight: The International Journal of Applied Forecasting.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
What We’ll Cover
Introductions
Basic Concepts
Constructing the Hierarchy
Examples
Q&A
Reconciliation Techniques
Summary
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
A Sample Hierarchy
Total Sales
Brand A
Retail
Cans
6-Pack 12-Pack
Bottles
Commercial
Brand B Brand C
Corporations typically deal with multiple levels of aggregation and require consistent forecasts at all levels.
Item Level
Group Levels
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
What Are the Forecasts Used For?
Item-level forecasts
Drive production, purchasing and inventory control
Short horizons are important
Intermediate-level forecasts
Drive marketing and revenue planning
Medium horizons are important
Upper-level forecasts
Guide “big picture” decision making
Medium to long horizons are important
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Should You Strive for One-Number Forecasts?
Depends on the environment.
The larger the company, the harder this is to achieve.
Communication between the different functional groups is very important. This is a primary goal of an S&OP process.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
A Very Simple Hierarchy
Total Cans
6-Pack 12-Pack
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Common Reconciliation Techniques
Bottom-Up
Create model-based forecasts at the lower level. Construct upper-level forecasts by summing nested lower-level forecasts.
Top-Down
First, create a model-based forecast at the top level by forecasting the aggregated history. Then, create model-based forecasts at the lower levels. Finally, apply proportionality factors to lower-level forecasts so that the forecasts sum to the top-level forecast.
Proportional Allocation
Disaggregate higher-level forecasts by applying proportionality factors. This method would be appropriate when proportions are constant and known.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Reconciliation Techniques Example
Total Cans
6-Pack 12-Pack
In a hierarchy with 3 or more levels, combinations of top-down and bottom-up approaches can be applied (i.e., middle-out).
Model-Based
6-Pack 7012-Pack 30Total Cans 120
Proportions(50-50)6060120
Top-Down
8436120
Bottom-Up
7030100
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Choosing a Reconciliation Approach
Group-level data is higher volume and often exhibits more structure than lower-level data—this argues for top-down.
If two items exhibit distinctly different behaviors, then a single model is unlikely to perform well—this argues for bottom-up.
If relationships between levels are not changing in time, then forecasting based on history does not add value—this argues for proportional allocation.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Hierarchical Data
Total Sales
Brand A
Retail
Cans
6-Pack 12-Pack
Bottles
Commercial
½ Kegs Full Kegs
Brand B Brand C
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Choosing a Reconciliation Approach
Start by determining if proportional allocation should be used.
Try to think like your consumers – how do they view the items?
At times, lack of structure at the lower levels may force you to use top-down approaches.
Measuring empirical performance is always an option.
Most multiple-level forecasts should combine top-down and bottom-up approaches.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Setting up the Hierarchy
The units of measure need to be comparable.
The hierarchy should be as simple as possible.
Discontinued items may need to be included to ensure group totals are correct.
The structure of the hierarchy should be selected for forecasting, NOT for reporting.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Two Alternative Hierarchies
Total
State 1
Business
Main Other
Residential
Basic Addline Other
Public
Coin Access
State 2 Etc.
Total
Business
Main
State 1 State 2 Etc.
Other
State 1 State 2 Etc.
Residential Public
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Summary
Many organizations forecast hierarchical data and require forecasts that are consistent across levels.
Defining the hierarchy to facilitate accurate forecasting is important.
Selection of an appropriate reconciliation strategy is also important and directly impacts forecast accuracy.
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Business Forecasting Seminar
September 20-22, 2010 – Boston, USAOctober 18-20, 2010 – London, UK
This three-day comprehensive course covers techniques, uses real-world examples and includes computer workshops using your data.Register at www.forecastpro.com
© 2010, Business Forecast Systems, Inc. www.forecastpro.com
Forecast Pro
Examples from today’s Webinar used Forecast Pro.
To learn more about Forecast Pro:Request a live WebEx demo for your team
(submit your request as a question right now)Visit www.forecastpro.comCall us at 617-484-5050