Flostock News #17 Vacillating about oscillating? Flostock’s 17th Law may help!

“Prisoner’s Dilemma” maintains market oscillation

Managers are "Locked Up"

Oscillation has debilitating effects on a business, so it is surprising that so many businesses accept it as an inevitable part of their existence. More than this, they actively contribute to it via their sourcing decisions. Flostock has identified a link between the well-known “Prisoner’s Dilemma” and the phenomenon of market oscillation. Understanding this connection can help companies mitigate the harmful effects of oscillation. 

As stated in Flostock’s 16th Law of Demand, impatient systems oscillate. Stocks generally have a desired level. When that level is in danger of falling below acceptable limits, people hurry to close prospective gaps. The time for attempting to close such a gap is called the leveraging time.  XXX , the rest of this text is blocked for proprietary reasons: if you want to know, contact us XXX

A remarkably large proportion of business activities are in oscillation at any given time, driven by the fear of being unable to keep their customers supplied. The fact that various players are all eager to compete perpetuates the system: they are (naturally) keen to compete downstream by keeping their customers supplied, and so they order too fast upstream (from their suppliers).

If all players would relax and take their time over re-ordering stocks, the effects of oscillation would subside. If only one player were to do this, however, that player would be at a disadvantage compared with the others who are still ordering plentiful stocks. In Game Theory, this phenomenon is called the Prisoner’s Dilemma: all players would benefit if they would only collaborate, but the fear of being outdone by one another leads to behaviors that disadvantage them all. We call this Flostock’s 17th Law of Demand:Prisoner’s Dilemma maintains market oscillation”.

Click here for more on the Prisoner’s Dilemma.  For help identifying the causes of oscillation in your own market and developing strategies to deal with it, please email info@no-spam-today-flostock.com or call us on +31(0) 6 11356703.

Dynamic reporting and modelling tool puts Finance professionals in the driving seat

See the flow

Financial reporting traditionally creates “snapshots” of a business’s performance at a given moment. The conventional annual report, for instance, displays a company’s balance sheet and P&L account “on” a specific date. A new tool from Flostock, however, offers the possibility of real-time financial reporting which turns the financial “snapshot” into a “film”, providing Finance specialists with far more accurate insights into the nature of their organization’s performance. 

CFOs, financial directors, controllers and accountants, as well as company directors and general managers, can all benefit from this unique new capability, which for the first time ever provides a real-time view of the flow of finances and the flow of goods. The balance sheet (= all stocks) and the profit & loss account (= all flows) therefore become dynamic, i.e. interlinked on a daily basis, with feedback loops and delays, and periodic key performance indicators such as EBITDA and solvency become “rolling”.

Financial variables such as prices, margins and capex, along with physical variables such as sales volumes, inventory and capacity, can be tracked on a daily basis, revealing peaks and troughs that would otherwise not be visible. The new reporting model puts Finance personnel in a much stronger position to model scenarios and evaluate strategic options, for besides its pure reporting function, it also allows for gaming and training with Flostock models. Financial restructuring can thus be accurately planned. Variables such as optimum utilization rates or optimum stock levels can therefore be worked out, the effects of price increases followed, and cash flows managed far more effectively than in the past.

Time for a financial health check in your business? Please email info@no-spam-today-flostock.com or call us on +31(0) 6 11356703 to find out more about how we might be able to help you.

Automotive suppliers need to plan for the replacement of “Generation 2000”

Generation 2000 will be ditched soon

If the forecourts of European car dealerships appear to be overflowing with new vehicles, there is a ray of light for suppliers to car manufacturers: “Generation 2000”, the stock of cars that came onto the roads at the start of the new millennium, will soon be due for replacement.

As “Generation 2000”reaches the end of its life and owners seek to replace their vehicles with new ones, demand will rise, and OEMs will look to their supply chain partners to help meet it. This will require planning, and Flostock can help OEM suppliers to predict this demand as it grows.

Currently car owners are replacing Generation 1990, which was considerably smaller than Generation 2000. It is important to take advantage of such moments in the business cycle of the automotive sector, for the general trend is in the opposite direction, with demand for cars falling in response to market saturation. This is attributable to a number of factors. One is the affluence of Europe, in which car ownership is nowadays the norm among the eligible population. The fact that most potential car owners already have a car means that new cars are generally purchased only when old ones need replacing. Thanks to a range of inbuilt rust protection and other engineering measures, however, cars last much longer nowadays than they used to. They therefore come up for replacement less often than in the past. A 10% longer lifetime per individual car translates into 10% lower total car sales.

Meanwhile, the popularity of the car among young urban professionals is in decline for a number of practical, economic and ethical reasons. And at the same time, the after-markets in central and eastern Europe, the Middle East and Africa – which used to offer new homes to large numbers of the cars traded in on being replaced in Europe – are also exerting less of a pull, as some of them are saturated too while others are in turmoil. This depresses the price of cars in part-exchange deals and makes it less attractive for the European motorist to exchange his or her existing car for a new one.

All in all, a complex picture for automotive suppliers looking to predict their demand. Flostock can help, however. Please email info@no-spam-today-flostock.com or call us on +31(0) 6 11356703 to find out how.

DSM and Flostock present Quantified Marketing at IBF 2014 conference

Meet us 20-22 November in Amsterdam

DSM and Flostock will be presenting a new forecasting tool, Quantified Marketing, at the Institute of Business Forecasting 2014 conference in Amsterdam on 20–22 November. It sets new standards in forecasting accuracy, as it takes into account the dynamism of the drivers that influence market demand.

Contrary to popular belief, demand is actually not chaotic: it goes up or down continuously, but for very specific reasons. These reasons are dependent on specific drivers, which in turn are influenced by other drivers, and so on down the line. Thus a B2B product order is primarily influenced by changing consumer demand for a given end-product, and by the predictable responses of the companies in the supply chains between the end-market and yourself.  Predictable behavior determines most of the demand, and can thus be forecast.

To forecast demand for a product with more than 90% accuracy, it is necessary to identify more that 90% of the relevant drivers, as well as the way these drivers interact. This is not practicable by intuition or experience alone. The number of drivers, the complexity of their interaction, and the individual timing of their effects are impossible to estimate with any degree of accuracy. This does not mean, however, that the demand process is chaotic. It simply means that demand is, by its nature, complex and, above all, dynamic. Crucially, it involves delays and is thus non-linear.

Our brains are not designed to process non-linear information. We simplify each problem (“A lion!”) into a linear problem (“Wants to eat me”), extrapolate it (“The lion is going to jump and will land on me”), and act on it (“Raise my spear”). We cannot process non-linear issues – such as compound interest, integration and differentiation – in our head, and certainly not if more than two such issues interact.

The field of System Dynamics has been developed to deal with just this type of problem. In System Dynamics, these problems are dissected into simple issues, described, and connected, after which a computer calculation is made that takes all factors into account. 

DSM and Flostock have together built a forecasting tool based on the above principles. This tool identifies the drivers for DSM’s demand and places these in a virtual reality model of DSM’s business and supply chain in the food additives sector.

The interaction between the drivers was first judged qualitatively, then measured quantitatively by looking at the past and matching the actual situation with the model.  The global economic crisis helped this procedure, because during that period the so-called Lehman Wave was so dominant that it alone caused 90% of demand variation. This allowed DSM and Flostock to conceptualize these possibilities and subsequently calibrate the model.

At the IBF conference in Amsterdam, we shall be demonstrating how this was done, and showing how DSM uses the model now. We look forward to welcoming you there! Conference tickets can be booked at www.ibf.org/1411.cfm. Alternatively, please email info@no-spam-today-flostock.com or call us on +31(0) 6 11356703 to find out more.