After an unseen disruption of demand in the first months of the global pandemic we have recovered (partially) and are preparing for what is about to come next. We have been flexible and adjusted our personal and professional life. What a rollercoaster it has been: Limiting our social contacts, home-schooling our children, working from home, taking care of each other to stay healthy and safe while worrying about the economic impact and the impact on our business.
As we thought supply/demand balancing was already challenging before 2020, who knew we were in for a challenge of a whole other level. Interesting times are lying ahead of us to say the least. Unfortunately we cannot push the pause button and wait for better times, on the contrary we need to act and lead our business through rough waters.
Global pandemic or not, our shareholders still expect us to lead the way and deliver predictable performance.
We need visibility for the coming months
How can we interpret the current ordering behaviour of our customers? Are we recovering back to "normal" levels and how fast? Or are some months just erratic behaviour and should we buckle up for more turbulence to come? How can we know what the coming months will bring for our company? What direction are we going? How do we create more short term visibility?
A well known best practice for creating more visibility is adding a collaborative forecasting process on top of your baseline statistical forecasting. During normal times you can gain a lot of visibility by structurally including customer information through involving your customers or your sales team into your monthly forecasting process.
However, if we ask our customers during a global pandemic what they expect in the coming months, we get confusing and mixed signals. It’s fair to say that our customer is struggling with the same questions. These are uncertain times for everybody on all levels. This does not mean customer collaboration is getting irrelevant. We still want to know immediately when customer plans are changing. But it means we need an extra pair of eyes to have an idea of where our market is going and be ahead of our customers to organize ourselves accordingly.
Adding an extra pair of eyes
Winning the forecasting game is about integrating multiple sources of information at the right level and the right time horizon. The statistical forecasting part of this game is disturbed because we can’t rely solely on our historical data. Next to that, our customers don't know either where we are heading. So, combining a quantitative baseline based on statistical forecasting with a strong collaborative forecasting process is not enough. We need to look further outside of our company walls.
Combining our internal data with external data, and quantifying the connection is easier said than done. Companies need to be able to point out macro-economic drivers which are leading for their business, and more specifically leading for the business during turbulent (recession/recovery) times. Leading indicator forecasting does exactly that and adds that extra pair of eyes during turbulent times. Below we'll give you tips on how to create more visibility for you own company by combining external and internal information in 4 practical steps.
Getting started with these 4 steps
First of all, bring together the internal & external data in case it would be scattered in your organisation. And take a look at the external market data that you are already buying. Most companies buy external market information, or have strategic marketing intelligence collecting data from the market.
Now, add general macro-economic indicators (from FRED, EUROSTAT, NBSC, …) to that list, as well as sector specific indicators that are intuitively impacting your business during normal times and now in particular.
Secondly, check which indicators are correlated and leading for your business over the period of 2000-2020.
Then zoom in on the period of the global financial crisis 2008-2009. What was the impact on your business then? What macro-economic indicators where leading for your business specifically during recession times? We need to be aware of the potential recession specific dynamics in our demand patterns. Where is there more damage coming up, and where do we see recovery signals? Beware that the macro-economic indicators that are normally correlating and leading for your business might not have predictive value during crisis times.
Finally use a regression model combining the identified indicators, as well as a forecasting model per indicator for a full perspective on what is coming at us in the next 3 to 6 months.
Let us know what you find, what have you learned from comparing the current crisis with the global financial crisis in your business? What are similarities, what are differences and what predictive value does this have for your business today?
Good luck & stay safe!
Learn more about leading indicators
Find out how you can improve your forecasting practices in this free E-book! We show you how including external market data in your demand planning gives you better insights in which factors drive your market.