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

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