Abstract
Firms require demand forecasts at different levels of aggregation to support a variety of resource allocation decisions. For example, a retailer needs store-level forecasts to manage inventory at the store, but also requires a regionally aggregated forecast for managing inventory at a distribution center. In generating an aggregate forecast, a firm can choose to make the forecast directly based on the aggregated data or indirectly by summing lower-level forecasts (i.e., bottom up). Our study investigates the relative performance of such hierarchical forecasting processes through a behavioral lens. We identify two judgment biases that affect the relative performance of direct and indirect forecasting approaches: a propensity for random judgment errors and a failure to benefit from the informational value that is embedded in the correlation structure between lowerlevel demands. Based on these biases, we characterize demand environments where one hierarchical process results in more accurate forecasts than the other.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 2745-2764 |
| Number of pages | 20 |
| Journal | Management Science |
| Volume | 62 |
| Issue number | 9 |
| DOIs | |
| State | Published - Sep 2016 |
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All Science Journal Classification (ASJC) codes
- Strategy and Management
- Management Science and Operations Research
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The sum and its parts : Judgmental hierarchical forecasting. / Kremer, Mirko; Siemsen, Enno; Thomas, Douglas J.
In: Management Science, Vol. 62, No. 9, 09.2016, p. 2745-2764.Research output: Contribution to journal › Article
TY - JOUR
T1 - The sum and its parts
T2 - Judgmental hierarchical forecasting
AU - Kremer, Mirko
AU - Siemsen, Enno
AU - Thomas, Douglas J.
PY - 2016/9
Y1 - 2016/9
N2 - Firms require demand forecasts at different levels of aggregation to support a variety of resource allocation decisions. For example, a retailer needs store-level forecasts to manage inventory at the store, but also requires a regionally aggregated forecast for managing inventory at a distribution center. In generating an aggregate forecast, a firm can choose to make the forecast directly based on the aggregated data or indirectly by summing lower-level forecasts (i.e., bottom up). Our study investigates the relative performance of such hierarchical forecasting processes through a behavioral lens. We identify two judgment biases that affect the relative performance of direct and indirect forecasting approaches: a propensity for random judgment errors and a failure to benefit from the informational value that is embedded in the correlation structure between lowerlevel demands. Based on these biases, we characterize demand environments where one hierarchical process results in more accurate forecasts than the other.
AB - Firms require demand forecasts at different levels of aggregation to support a variety of resource allocation decisions. For example, a retailer needs store-level forecasts to manage inventory at the store, but also requires a regionally aggregated forecast for managing inventory at a distribution center. In generating an aggregate forecast, a firm can choose to make the forecast directly based on the aggregated data or indirectly by summing lower-level forecasts (i.e., bottom up). Our study investigates the relative performance of such hierarchical forecasting processes through a behavioral lens. We identify two judgment biases that affect the relative performance of direct and indirect forecasting approaches: a propensity for random judgment errors and a failure to benefit from the informational value that is embedded in the correlation structure between lowerlevel demands. Based on these biases, we characterize demand environments where one hierarchical process results in more accurate forecasts than the other.
UR - http://www.scopus.com/inward/record.url?scp=84988592835&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84988592835&partnerID=8YFLogxK
U2 - 10.1287/mnsc.2015.2259
DO - 10.1287/mnsc.2015.2259
M3 - Article
AN - SCOPUS:84988592835
VL - 62
SP - 2745
EP - 2764
JO - Management Science
JF - Management Science
SN - 0025-1909
IS - 9
ER -