The current process often used by S&OP
The bottom-up approach is a concept where the total sales forecast is aggregated from all products sold within a region. These operational forecast results are aggregated and presented to planners to set the tactical planning. In order to capture the upcoming demand, organizations tend to include the sales forecasts provided by the sales departments in their tactical forecast.
Getting an accurate picture of the actual demand through sales forecasts can be challenging, especially when these forecasts generated are based on human estimations, prone to biases.
Limitations of this process
Due to the large number of forecasts produced in the bottom-up approach, the forecast method is limited to a simple univariate forecasting model. It does not factor in market trends, the different business cycles in the regions, etc. Consequently, S&OP planners could miss out on the opportunity to apply leading indicators to their aggregated forecast as univariate forecasting models do not allow for that. The risk of not utilizing leading indicators can mean failing to capture trend shifts and decreased forecast accuracy.
By running multivariate models and analysis in parallel, your team can combine sales forecasts and market information, and let the two validate each other.
The benefits of driving your top-down strategy and utilizing it to align with the operational forecasts
It is crucial for tactical planning to include a top-down approach and identify the leading indicators for each region and product group. The benefit of including a top-down approach is that it allows organizations to incorporate market information into the tactical forecast.
How can you achieve this? Your team does not have to pick one forecasting method over the other. By running Indicio’s multivariate models and analysis in parallel, your team can combine sales forecasts and market information, and let the two validate each other.
By using leading indicators, your organization has the capacity to generate a more holistic forecast, one that factors in the economic developments in the region and the business cycle for the specific product group. By doing so, your team gains added confidence in the forecast generated.
An added advantage of using multivariate models is meeting volatility challenges by conducting scenario analysis. We live in times where volatility is a given, impacting many industries agnostically. Indicio’s built-in features address these concerns, everything from ensuring clean data in minutes to selecting the optimal set of leading indicators needed to forecast your data, and finally, forecast your data using econometric forecast models.