Hierarchical forecasting

What is hierarchical forecasting?

Hierarchical forecasting is a specialized approach to forecasting that involves predicting future values for multiple related time series at different levels of aggregation within an organization's hierarchy.

The hierarchical forecasting process recognizes that the demand patterns and dynamics may vary at different levels of the hierarchy. For example, the demand for a product category might be influenced by broader market trends, while the demand for individual products within that category could be affected by specific customer preferences or marketing efforts.

How are they structured?

The hierarchical structure typically reflects how the organization’s products or services are organized, such as by

• Product hierarchy: Grouping products by categories, subcategories, and individual SKUs.
• Geographical hierarchy: Grouping regions by country, state, city, etc.
• Customer segment hierarchy: Grouping customers based on segments, such as demographics, buying behavior, etc.
• Channel hierarchy: Grouping sales channels, such as online sales, brick-and-mortar stores, distributors, etc.