A concept that I often find people struggle with is that while in the past, the total is always equal to the sum of the parts, in the future that isn’t always the best way to approach things. When we look at sales history, the total sales volume is equal to the sum of the sales for each item sold to each customer. This straightforward arithmetic leads people to think then that the best way to plan the future is to plan the sale of each item to each customer, and then add up the result. This is what we would call a bottom-up planning approach.
The problem that we run into with bottom-up planning is that there is often interactivity between the sales of our items, and interactivity between our customers. An increase in the price of one product may shift customers to buy more of another. We regularly discuss this interactivity when we think about new products (cannibalization) and discontinuations (flowback), but the truth is that there are many other subtle drivers of interactivity between the products in a portfolio. Advertising and promotion of product A may cannibalize sales of product B. A deep discount offered by Customer A may impact the sales at Customer B. Accounting for all of these interactions between products is extremely difficult to do on an item by item basis.
The solution to this is to look at groups of products and groups of customers. Planning in aggregate allows us to naturally account for these interactions because they tend to cancel each other out in total. This is what we would call a top-down approach. Aggregate planning yields many benefits in mid to long-term planning and is often a critical unlock to enable a business to extend their planning horizon. The problem, however, is that it doesn’t give us the level of detail that we need in the near-term plan. We ultimately need to know which items to manufacture, and which customers to sell them to.
The solution is to use both approaches. Top down planning ensures that we have an accurate aggregate plan (we often call this “sizing” the business), and bottom-up planning gives us a basis against which we can disaggregate that aggregate plan back down to the item/customer level. The bottom-up plan serves to establish the factors by which we will prorate the total (and in some cases establishes certain fixed item/customer level plans as appropriate). At the same time, a bottom-up plan can also identify gaps or missing assumptions – for example if the disaggregation of the aggregate plan would result in item level plans being implausible (or worse, negative) then we might pause and reconsider the assumptions behind the aggregate plan.
Greg Spira 