Evaluation of hierarchical forecasting for substitutable products

Evaluation of hierarchical forecasting for substitutable products

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Article ID: iaor2009786
Country: United Kingdom
Volume: 4
Issue: 3
Start Page Number: 277
End Page Number: 295
Publication Date: Mar 2008
Journal: International Journal of Services and Operations Management
Authors: , ,
Keywords: production
Abstract:

This paper addresses hierarchical forecasting in a production planning environment. Specifically, we examine the relative effectiveness of Top-Down (TD) and Bottom-Up (BU) strategies for forecasting the demand for a substitutable product (which belongs to a family) as well as the demand for the product family under different types of family demand processes. Through a simulation study, it is revealed that the TD strategy consistently outperforms the BU strategy for forecasting product family demand. The relative superiority of the TD strategy further improves by as much as 52% as the product demand variability increases and the degree of substitutability between the products decreases. This phenomenon, however, is not always true for forecasting the demand for the products within the family. In this case, it is found that there are a few situations wherein the BU strategy marginally outperforms the TD strategy, especially when the product demand variability is high and the degree of product substitutability is low.

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