bottom up and top down

[prasnop]

Hi Experts,

Could anyone please help with examples that what does mean by Bottom-up Forecast and Top-down forecast in APO DP?

Thanks,

[satish_waghmare3]

Hello Prasnop,

Top-Down forecast is to use statistical forecasting on more aggregated data(like Region in the example given by DB) and then to do disaggregation(Proportion Factors) to generate the lower-level forecasts.

Alternative approach is Bottom-up forecast in which you run statistical forecasting directly to the lowest-level of detail(like Region+Customer+Material level in the example given by DB) and construct aggregate-level forecasts by summing the lower-level forecasts.

I would like to share few important points which you should consider to decide forecasting approach and level on which you should forecast.

( 1 ) . Deciding upon the lowest level at which to generate statistical forecasts(bottom-up) and deciding how to disaggregate a statistical forecast to lower levels(top-down) can have a major impact on forecast accuracy.

( 2 ). Typically(but not always), Forecast is likely to be less accurate at a lower level and it will also complicate the overall forecasting process. As you know, when we disaggregate data, the result is lower volume, less structure/pattern to the data set which will make harder to forecast using statistical models and reduced forecast accuracy (or just a flat line forecast).

( 3 ). Besides, we should always keep the CVC structure (forecasting hierarchy) as simple as possible, and make sure we do not add any unnecessary levels/characteristics in MPOS.

Hope this will help.

Thank you

Satish Waghmare

[Former Member]

Prasnop,

These terms usually are in reference to aggregation in hierarchical datasets.

For example, you may have your sales data arranged in the following hierarchy, from 'most aggregated' to 'most detailed':

1.  Region

2.  Customer

3.  Material

where every sales record contains all three characteristics.  For a region, there may be many customers, and for a customer there may be many materials.

Forecasting 'top down' would be forecasting at the highest level of aggregation, in this example 'Region'.

Forecasting 'bottom up' would be forecasting at the most discrete level of detail, in this example 'Region/Customer/Material'.

Also possible is forecasting 'middle out', which means forecasting at some intermediate level of aggregation.

The effort to forecast at the most detailed level is considerable (there are many more forecasts to create and manage).  Most companies choose to forecast using 'top down' or 'middle out'.

Best Regards,

DB49