Effective Strategies for Forecasting a Product Hierarchy Strategies for Forecasting a Product Hierarchy Presented by Eric Stellwagen Vice President & Cofounder Business Forecast Systems,

Effective Strategies for Forecasting a

Product Hierarchy

Presented by Eric Stellwagen Vice President & Cofounder Business Forecast Systems, Inc. [email protected]

Business Forecast Systems, Inc. 68 Leonard Street Belmont, MA 02478 USA (617) 484-5050 www.forecastpro.com

© 2018, Business Forecast Systems, Inc. www.forecastpro.com

On-Demand Webinars & Materials

S

A recording of today’s Webinar will be posted next week

on forecastpro.com along with the slide set (in .pdf

format)

All previously presented Webinars are archived and

available for viewing on-demand at forecastpro.com

Attendees will receive an email notifying them when the

recording and materials are available


Eric Stellwagen

Served on the board of directors of the International Institute of Forecasters for 12 years. Is currently serving on the practitioner advisory board of Foresight: The International Journal of Applied Forecasting.

President, CEO & Co-founder of Business Forecast Systems, Inc.

Co-author of Forecast Pro product line.

More than 33 years of dedicated business forecasting experience.

.


Sarah Darin

20 years of experience with statistical consulting, sales forecasting, regression modeling and marketing analytics. Experience across a broad range of

industries, including Consumer Packaged Goods, Telecommunications, Technology, Retail, Automotive and Finance. Undergraduate degree in Applied Mathematics from Harvard University and a Master’s of Science in Statistics from the University of Chicago, where she also served as a Lecturer.


What We’ll Cover

Introductions

Basic Concepts

Constructing the Hierarchy

Examples

Q&A

Reconciliation Techniques

Summary


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


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


Should You Strive for One-Number Forecasts?

Depends on the environment.

The larger the company, the harder this is to achieve.

Communication among the different functional

groups is very important. This is a primary goal of an

S&OP process.


A Very Simple Hierarchy

Total Cans

6-Pack 12-Pack


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.


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 70

12-Pack 30

Total Cans 120

Proportions

(50-50)

60

60

120

Top-Down

84

36

120

Bottom-Up

70

30

100


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.


Hierarchical Data

Total Sales

Brand A

Retail

Cans

6-Pack 12-Pack

Bottles

Commercial

½ Kegs Full Kegs

Brand B Brand C


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.


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.


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


Example


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.


On-Demand Webinars & Materials

S

A recording of today’s Webinar will be posted next week

on forecastpro.com along with the slide set (in .pdf

format)

All previously presented Webinars are archived and

available for viewing on-demand on forecastpro.com

Attendees will receive an email notifying them when the

recording and materials are available


Our Next Webinar

The Ins and Outs of Using Dynamic Regression Models for Forecasting

July 12, 2018 @ 1:30 pm EDT

Presented by Eric Stellwagen, CEO and Sarah Darin, Senior Consultant, Business Forecast Systems, Inc.

Visit www.forecastpro.com to sign up!


Forecast Pro Software

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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.com

Call us at +1.617.484.5050


Business Forecasting Seminar

Business Forecasting: Techniques, Applications and Best Practices

April 9-11, 2018 in London, UK

This comprehensive class surveys business forecasting methods

explains how they work conceptually

discusses their pros and cons

demonstrates best practices for implementing these methods in a real-world environment

More info at: forecastpro.com/seminars/seminar2018/


Training and Workshops

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We offer forecasting seminars, Webinars and product

training workshops.

On-site, and remote-based (via WebEx) classes are

available.

Learn more at www.forecastpro.com

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Questions?


Thank you for attending!

Documents

Effective Strategies for Forecasting a Product Hierarchy Strategies for Forecasting a Product Hierarchy Presented by Eric Stellwagen Vice President & Cofounder Business Forecast Systems,