The forecast for the economy today is mostly sunny and mild temperatures. Things look great – unemployment at all-time lows, economy growing at over 3%, and consumer confidence is on the rise. All of this adds up to top line growth, reduced inventories, and efficiencies of scale reducing cost for businesses. But that’s today – what about tomorrow?
The end is nigh. But fear not, because demand planners are here to save the day.
Not being a Debbie Downer but part of forecasting is looking forward and preparing for what may come, including wider economic downturns that threaten even the most robust of businesses. A naive forecast assumes (somewhat naively) that what is happening today is sure to continue unabated tomorrow. With that in mind, the current economic expansion is the second-longest in U.S. History, leading many economists to forecast a recession as early as next year.
Half the economists surveyed just a couple of months ago by the National Association of Business Economics foresee a recession starting in late 2019 or early 2020, and two-thirds are predicting a slump by the end of 2020. Last year someone from the Washington Times even went so far as to say that the outlook for 2019 is “worse than 2008, it reassembles 1937…”. Not to mention any names but the author must have been a genius to foresee this that far ago and maybe he should have written a book about it (see Cultural Cycles why History Repeats Itself, by Eric Wilson).
If you are a retailer, manufacturer or distributor, the day-to-day moves in politics or the Dow do not drive the day-to-day operations of your business
Shameless plug aside, the one constant will be change. I think the only common element we see today is uncertainty, and we have a lot of that. Tariffs, wars and rumors of wars, inflationary concerns, rising interest rates, government shutdowns – headlines may be important to stockholders, but despite what you may be hearing, business operations are not coming to a terrible end in the next twelve months. If you are a retailer, manufacturer, or distributor, the day-to-day moves in politics or the Dow neither drive, nor necessarily reflect, the day-to-day operations of your business.
What Does This Really Mean For Business?
It suggests that if the economy does change, you will still need to accomplish today’s tasks, but more efficiently. Managers must cope with potential lower demand for goods and services, limited pricing power and strong deflationary pressures, and tighter credit for consumers and businesses. This all begins to create the perfect storm and adds up to:
Smaller top line
Lower or even shrinking top line growth as consumers restrict spending
Potentially fewercconsumers with additional job losses
Less financing available because of uncertain financial conditions and tighter consumer credit
Reduced bottom line
Worse margins driven by too little demand
Too little disposable income
Too much inventories placing pressure on cutting prices to retain sales
Less cash and more costs
Higher cost of operations caused by tight credit and higher cost of money when it is available
Increased volatility of demand and the desire to maintain low inventory levels creates imbalances, drives inefficiencies, and adds cost
So What Needs To Change?
There aren’t many silver bullets available. In a good economy, you could look to sales and marketing and follow a top line growth strategy effectively, but when sales tank due to poor economic conditions, there is only one thing that works: an unbiased view of the future and an effective Supply Chain with a laser sharp focus on Cash, Cost, and Service.
When sales tank due to poor economic conditions, there is only one thing that works: an unbiased view of the future and an effective Supply Chain
During uncertain times, a good demand plan is the cornerstone that delivers both cost and asset turnover. In fact, Demand Planners are the foundational element that can make or break an organization during downturns in the economy. Take, for example, forecasting improvements. Improvements in forecast accuracy can enable efficiencies and improve responsiveness to market conditions. More accurate demand forecasts facilitate better plans, resulting in lower inventory levels, increasing inventory turnover while simultaneously improving customer service levels. For operations, better predictions of customer demand enable higher capacity utilization rates which lower per unit costs, and facilitate the staging of inventories at key locations in the supply chain.
So What Should Businesses Do To Prepare For Economic Downturn?
With today’s instability in the economy, companies should increasingly focus on the adoption of forecasting and demand planning best practices, and development of their demand planning talent to help navigate the rough waters ahead. If you haven’t done this in your company already, develop forecasting and demand planning as a function with specific competencies. Look at different ways that demand planning can begin to add value to other functions in the organization. Consider augmenting your team with specialized roles and develop skill sets outside of your key function and focus on the core competencies of your overall team. There is a trend towards a more centralized function, taking forecasting analytics out of just Supply Chain, because an independent Predictive Analytics and Planning department can drive insights across all functions, and beyond just driving Supply Chain efficiency.
Also, invest in an analytical and advanced decision-making infrastructure. Begin looking at ways to automate. While you might not be able to afford a sprawling automated warehouse operation like Amazon’s, you might be able to automate parts of demand planning and other processes to free you up to focus on key drivers and process management. In the future, it is not just about the internal supply chain, but forecasting will help look at the extended external service chain and focus on before and after the sell. You may also find other ways to help drive business process using forecasts to add value, and enable decision making in different areas. Finally, we need to start looking more at the softer skill sets and core competencies of demand planners going forward and invest more in training and development.
In difficult times, demand planning and a clearer view of the future has become a fundamental weapon to compete in an uncertain and changing economy
Especially in difficult times, demand planning and a clearer view of the future has become a fundamental weapon to compete in an uncertain and changing economy. The smart companies will not only be investing in predictive analytics and planning capabilities but supporting and growing their current resources through attending conferences, training, and certification.
I am not sure what the stock market will do, but I do know what the top performing companies will do during a bad economy. When and if times do get tough, the best companies utilize forecasting and demand planning strategies that will not only see them through a rough economy but create efficiencies that translate to higher growth and margin after the downturn as well.