The folly of forecasting: The effects of a disaggregated demand forecasting system on forecast error, forecast positive bias, and inventory levels

2024/01/18 by Brüggen, Alexander, Grabner, Isabella, Sedatole, Karen

paper · doi:10.57938/f8dd0c7e-ed0f-4070-814a-4fd03fafcfde

Abstract

Periodic demand forecasts are the primary planning and coordination mechanism within <br/>organizations. Because most demand forecasts incorporate human judgment, they are subject <br/>to both unintentional error and intentional opportunistic bias. We examine whether a <br/>disaggregation of the forecast into various sources of demand reduces forecast error and bias. <br/>Using proprietary data from a manufacturing organization, we find that absolute demand <br/>forecast error declines following the implementation of a disaggregated forecast system. We <br/>also find a favorable effect of forecast disaggregation on finished goods inventory without a <br/>corresponding increase in costly production plan changes. We further document a decline in <br/>positive forecast bias, except for products whose production is limited owing to scarce <br/>production resources. This implies that disaggregation alone is not sufficient to overcome <br/>heightened incentives of self-interested sales managers to positively bias the forecast for the <br/>very products that an organization would like to avoid tying up in inventory.

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