In the CPG industry, bottom-up planning is one way to forecast sales and financial results.
The concept is simple. A bottom-up plan is a forecast that is created by customer, and by item or item group. You have a complete forecast when you sum up all the customers and items. That’s why it’s called a bottom-up plan.
Here are the primary components:
Base volume or baseline:
- This is what you expect to sell by customer for an item or item group without promotions. This is the starting point of the forecast.
- Ideally this base should be by week for better accuracy, but I’ve seen many companies just estimate base sales by month.
- Generating the base forecast should include three components: Magnitude (how high or low), Seasonality, and overall Trend (up, down, or flat).
- For most CPG companies, the base is planned in units, like cases or eaches. In some categories, the base may be planned in revenue.
- Incremental volume & promotional spending:
- This is the extra amount you expect to sell as the result of promotional activity and is called promotional lift.
- Promotional spending include all the discounts you offer, along with other fees and costs associated with generating this extra lift.
- The total volume forecast is calculated by adding the Base volume and incremental volume. This is typically done in the primary unit-of-measure for the company, like cases, gallons, pounds, or eaches.
- Once you know how many units you will sell, multiple the units by list price to get total revenue.
- Subtract cost-of-goods-sold, and promotional spending to get net variable contribution.
These are the building blocks of a bottom-up forecast. Even if you don’t use a TPM or demand planning solution for your forecasting, you may still be using these concepts in your Excel planning sheets.
Go to our other blog to review the advantages of this forecasting approach for CPG: www.cgsquared.com/tpm-blog
Co-founder & President
CG Squared, Inc.