Flostock News #10 The Lehman Wave waved until 2012


DSM’s Lehman Wave till 2012

DSM’s Lehman Wave

Royal DSM, Eindhoven University and Flostock published an an article with above title in the European Coatings Journal with a review of the model forecast that was made for DSM in 2009. The first conclusion in the article  is that modeling a supply chain to analyze a business and to forecast demand is possible. The second conclusion, based on the exceptional fit between model and reality, is that the oscillation is caused by a long lead-time in combination with a strong under-estimation of what already has been ordered. As a result of these behavioral issues this market segment is so sensitive for shocks that the de-stocking after the Lehman bankruptcy caused the Lehman Wave to continue over a period of four years. The third conclusion is that this market will continue to be volatile when exposed to shocks like the current recovery of the European construction market. This article <click here>  was published in February 2014 and followed two earlier DSM articles on the subject in ECJ. 

Commodities are locked in, according to Flostock’s 10th Law.

Commodites are locked in

Meaning that there are very strong restrictions in capacity and storage, while demand is strongly dictated by the end market demand. On top of that, expansions in general need a very long lead time and are capital intense, so are only made after due consideration. Competition is hard, thus margins are at the minimum. This locked-in setting explains the high price elasticity of commodities up and down and it explains the often seen volatility. When a shock like the Lehman Wave takes place in these industries, it can take years before the water calms down again. And the lock-in explains what we call the commodity investment cycle. Fortunately, all these factors can be taken into account when building supply chain models for high volume products. 

Consumer confidence about the future

Consumer confidence is also locked in

As to be expected, people follow the news and don’t include non-linear thinking in their future expectations. That means that if media are gloomy about the economy and shortages and banking problems, people become nervous and pessimistic and stop buying.  Several gloomy people told me over the last years that they believe they’d seen the peak in economic well-being and their children will be poorer again. What nonsense!  We are still getting richer & richer. Our great grandchildren will be 2 1/2 times richer than we are now. If the economy grows only 1% per year (above inflation, of course), average income will double in 70 years. At 2%, we’ll double in 35 years.  Of course, if your children are spoiled and lazy and don’t go to school or have no initiative, they might be poor later. But that will not be the case for society as a whole. 

Alternative 2 to the Flostock forecasting method: Customer collaboration

Hé, collaborator!

It is possible to obtain a qualitative view of the future by asking your customers what they expect, either direct or via a sort of market research. When you ask enough customers you get an average view that is one step closer to the end market, so it is probably better than sailing on your own feeling alone. Problem with this is that customers, like yourself, don’t know what the future will bring. They are as susceptible to emotions, bias, prejudices and scares projected by the media as you are. Customer collaboration is close to the purchase managers index (PMI): it is a sentimental forecast.  And like simple extrapolation: customer sentiment also forecasts in a linear way and sentiment never includes supply chain effects.