Comparative Analysis of Reconciliation Techniques: Bottom-Up, Top-Down, and MinT for Product Forecasting in Retail SMEs

Small and Medium Enterprises (SMEs) have experienced rapid growth, contributing approximately 95% to the global economy, 60% to global employment, and 50% to global GDP. This growth is accompanied by significant challenges, with approximately 70% of SMEs failing within the first three years, primarily due to poor inventory management. It emphasizes the crucial role of accurate demand forecasting for SMEs, particularly in the retail sector, where time series at various levels of hierarchical structure exhibit different scales and display diverse patterns. However, most existing research on demand forecasting for SMEs focuses on a single hierarchical level—either bottom, middle, or top—without addressing the entire hierarchy. The research sought to address this gap by forecasting across all hierarchical levels and evaluating different reconciliation techniques to generate coherent and accurate forecasts for multiple products in retail SMEs. The ETS state space model was used as the base forecasting model. This model was widely recognized as a benchmark in forecasting competitions. The reconciliation methods assessed were Bottom-Up, Top-Down based on historical proportions (average proportions), Top-Down based on forecast proportions, and Minimum Trace (MinT) (Ordinary Least Squares (OLS), OLS Non-Negative (OLS Non-Neg), Weighted Least Squares (WLS), and WLS Non-Negative (WLS Non-Neg)). The evaluation results show that the OLS Non-Negative method, with an average SMAPE value of 35.335%, produces more accurate reconciliation than other methods. In addition, this method also outperforms the base model with an increase in accuracy of 13%.