Demand Forecasting in Volatile Markets

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Demand is not random

Demand for products of upstream suppliers is always caused by consumption in an end market. End market can be in retail or capital investments. The string of companies between an upstream supplier and its downstream market we call the supply chain. Demand for upstream products is more volatile than consumption at the end market, because supply chains adapt their inventory to demand. The supply chain can be as long as a year or more, so when this whole chain adapts its inventory, the effect is big. As a result a small wave in the end market becomes a big wave at the upstream level.

Flostock has developed a unique method of supply chain modeling that allows the translation of downstream consumption into upstream demand for products. The Flostock model takes all lead times, inventory and feedback loops into account and does that so well, that accuracy improves the higher the volatility is. 

Volatile Markets

Examples are most basic, oil & gas, chemistry, steel mills, and further downstream steel parts producers, paper mills, cereals, minerals. Also volatile are industries that supply capacity goods to other industries, such as machine building, trucks, heavy equipment, and IC/computers, office supplies, shipbuilding.  Even more volatile are the suppliers to these volatile industries. 

Demand follows the Flostock Laws of Demand

The supply chain response is based on two types of variables. The first type consists of facts, like capacity, warehouse size, desired inventory coverage, batch size and transport lead times, which facts are known in the industry and recorded in bookkeeping systems. They can be estimated or obtained by interviews or from public sources. The second type of variable is related to behavior and is so consistent over time that it becomes a fixed property of a supply chain. The behavior can be estimated and then fine-tuned by measuring the behavior in the past. Flostock has collected all these logics in a series of “laws” and built computer models that embody these laws.

Lehman Wave as an opportunity to calibrate

After Lehman Brothers went bankrupt in 2009 interest rates peaked at an all-time high and all credit disappeared. Companies had only one choice for freeing up cash and that was by actively reducing their inventory coverage. For a supplier this de-stocking is experienced as lower demand, so a supplier reacts by reducing his inventory again. This unprecedented cumulative de-stocking caused an huge dip in sales at the end of 2008, early 2009. Thereafter stocks had to recover and a sales peak resulted, followed in many industries by a second dip and sometimes again by more peaks and dips. We have called this The Lehman Wave. Looking back, the Lehman Wave is a unique opportunity to calibrate supply chain models with respect to behavior. As they say: when the water retreats, the rocks become visible.

Forecasting in volatile markets

For demand forecasting in a stable market you should not call us. If you however experience strong volatility, you may need stock & flow modeling. Flostock specializes in analyzing complex systems with volatile demand or supply, and builds models for these situations in System Dynamics software. 


Recommended partners for connecting the Flostock results in demand forecasting with your operations can be Involvation, EyeOn or INFORM. Click here for a short overview.