Flostock News #11 Analyzing the Crimea


How to beat the butterfly effect?

Butterflies create chaos

The Butterfly effect in Chaos Theory says that a small event can have big effects. For many forecasters this is a reason for not building causal models (A causes B, which causes C) and sticking to correlation models (if A happens, usually C happens). Flostock has developed two new insights that help taking the chaos out of the Butterfly: Stock Depth  and Active Destocking. Stock depth, as described in Flostock 2nd Law of Demand, is the length of the supply chain, measured in inventory. Active destocking is what caused the Lehman Wave. More and more renowned institutions, including Financial Times, MIT, ECB, Wharton, Cambridge, TU/e  and McKinsey, have meanwhile quoted these insights. The strong effect that these two drivers can have, explain why causal models without them indeed remain chaotic. With them, we have a chance.


Alternative 3 to the Flostock forecasting method: Bottom Up

Bottoms up.

Many companies enter expected sales on product, customer or even product-customer level into their ERP system. Some companies do this up to 18 months into the future. When the whole crew of sales managers is monthly filling up a database, bottom up, it seems that the combined level must be reliable because it is based on very careful thinking by people who know their customers best, a bit like crowdsourcing. Problem is that the sales managers do not know what their customers will order, because their customers don’t know either. And the people involved often adapt their detailed forecast to the expected total, then split it up until it fits. Another problem is that it is a lot of work, and it gives the false impression that it is accurate and well supported by the team. And it is only linear, and it does not take the supply chain effects into account. Main problem is that it is sentimental. Advantages of this system? Don’t know. It sounds solid because it is expensive. I’d say that in most cases this can only be used to break up a forecast on total level into customer/product combinations for production planning. Don’t you ever base your capacity expansions on this. I expect that many companies use this because everybody is doing it, it is massive, expensive and sounds as if everything is under control. “Nobody ever got fired for properly implementing a huge and expensive ERP system. “ Or were they?

Lead-times make the world volatile, according to Flostock’s 11th Law.

Lead-times cause volatility

Lead-time, also known as delay, creates oscillations in all processes around the world, not just in supply chains and logistics, but in chemical installations, politics, societal changes, and guitars as well. Without delay or with a shorter delay most oscillations would not exist or dampen out quickly. And longer lead-times give more and bigger oscillations, so the of-shoring trend of the last 20 years has made the world much more susceptible to volatility. Your warehouses at the far end of the world probably have the biggest fluctuation in storage level. Demand for Made-to-Order products often fluctuates more than for Made-to-Stock products. Capacity for electricity generation is cyclic. Slowly but steadily growing smog (i.e. with long lead time) in China will kill its industrial growth before it recuperates. The monthly variation of your sales is also caused by lead time. 3D printing will reduce oscillation. Good planning, a reliable forecast and full transparency could prevent oscillation, but in many cases that is not possible and volatility is the result. 

Does the Crimea interrupt your supply chain?

Crimea disruption supply chains Russia
Crimea in the black sea

Tensions around the Crimea are building up, and it may change the relations between Russia and the rest of the world. If you are worried about how this would interfere with the supply of raw materials or finished products to or from Russia, and you don’t know how to quantify it, give us a call. We can build a supply chain model of your business environment, including the supply lines involving Russia and Ukraine and asses in a number of scenarios what possible disruptions would mean for your business. We call it Quantified Marketing, but you could also say Virtual Reality Supply Chain  Modeling.