Flostock News #1 Very High Forecast accuracy

DSM forecast 97% correct

A multi-disciplined project team from DSM and Flostock designed a supply chain model for the food ingredients industry, specifically for the yeast extracts of DSM. The demand forecast for the second half of 2012 was made in May 2012 and the average accuracy over said whole period was 97,5%.  The model is based on the supply chain, consisting of food retail, distribution, food producers, flavor & fragrance houses and the yeast producers such as DSM. End market demand is represented by a Eurostat publication for the food industry. Product penetration of these healthy products that replace salt is based on market studies of new  product introductions, published by a market research company. A publication about the project is in preparation. 

Supply chain is a tube, according to Flostock’s First Law

Basic in Flostock’s view is that there is a direction in the real economy: All goods flow from their basic sources, such as mines, agriculture or oil-fields, to the end consumer. In this flow no product gets lost: all matter that goes into the supply chain also leaves the supply chain. This has important consequences. This we call --a bit presumptuous perhaps -- Flostock’s First Law. It says that…. if no product exits at the end, no product can be put in at the beginning. The supply chain is a tube, and if it is clogged at the end, it stops.  If it is clogged at the beginning, so for a while no new product can enter at the beginning, the chain will deplete. If it is clogged halfway, downstream will deplete and upstream will overstock, until after a while both ends will stop.  As a consequence of the First Law, without clogging, if the end market grows 1%, the upstream supply also must grow 1%. This makes it possible to derive a growth trend in upstream demand from downstream demand.

 In the next newsletter we will describe the 2nd Law of Flostock:  the amplitude of upstream demand is proportional to the stock depth. 

The amazing influence of inventory on the economy

Industrial production in Europe can be calculated and forecasted, starting from expenditures in the end market and taking the stock building and delays in the European supply chains into account. This was shown by Flostock in a recent article in Chemistry Today. The article explains the amazing, often ignored, and always underestimated impact of stocks on the economy. It also shows that supply chain models can be used to translate key economic indicators for end markets to upstream economic indicators and thus in the same fashion these models can calculate and forecast upstream demand.  It confirms the general principle that downstream consumption is causing upstream supply.  One extra factor that needs to be included in the calculation is the massive de-stocking that took place worldwide after the bankruptcy of Lehman brothers, which started the so-called Lehman Wave. Expenditures include retail, construction, capital formation, government expenditures and exports minus imports. Click here for the full article in English. It was also published in Dutch on www.mejudice.nl.  

When Construction makes a turn, demand will quickly increase

The turnover of Construction companies in Europe is still going down and is now 22% below the peak in 2007. The Construction industry at 1 trillion Euro is about 1/12 of GDP of Europe, and double that size when the suppliers to construction and constructions followers like furniture retail are included. This includes not only concrete and window frame producers, but also producers of home appliances, carpets, paint, steel, and many chemical companies.  This means that any growth or decline of construction will immediately have a huge effect on the economy as a whole. In an up-going market Construction can create a bubble and overheating. In a declining economy it aggravates problems strongly. The European economy therefore will not recover before Construction recovers. And when it recovers, upstream demand will suddenly SEE A STEP CHANGE IN  VOLUME BECAUSE AFTER THE TURNING POINT the stocks in the supply chain will need to be built in stead of burned. if the change in growth of construction is very fast, upstream companies will experience a temporary peak in demand.


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