Flostock News #20

Stocks give predictability, according to Flostock’s 19th law of demand

Stocks indicate the direction

Most companies looking for a forecast want to forecast a flow, like sales. Hardly anybody is forecasting a stock . Nobody is forecasting inventory. The fact that the Flostock models can predict the future, however,  is based on the effects of stocks. If Stocks are in play, and in real worlds that is always the case, the Flostock methods quickly demonstrate their added value. Stocks can be gigantic compared with flows, and when these stocks start moving and add to the flow, all normal flows If the trigger is known, the resulting flow can be predicted because most supply chain behavior is stable, so the speed of moving of the stocks is fixed. 

You, dear reader, probably don’t have a clear view of a moving stock. You may think of melting snow, or the breaking of a dike, or the tides, which are extreme forms of shifting stocks. But seemingly stable stocks that shift a little bit can dramatically change the flows. Look at all the capital assets of the industry: when credit became short in the crisis, the stocks changed behavior: their owners decided to let them age, and as a result, the normal replacement flow dried up almost completely.  Stable manager behavior and fixed supply chain structures make it possible to forecast the flows that are generated by this movement of stocks, like the strength of the tidal flow in the Channel is caused by the distance of moon and the shape of the coast line.

Stocks cannot be stopped, according to Flostock’s 20th law of demand

Stocks are inert

Flows can be stopped by people at any moment, immediately, and restarted immediately, that is, if the source stock and target stock allow it.  Stocks, au contraire, cannot be changed easily and can certainly not be stopped. If the out- and inflows of a stock are stopped, the stock freezes but continues to exist.  It never goes away. When you come back after a week, everything is still there. In contrast: if a flow is stopped, it immediately ceases to exist, for 100%. When your customer stops buying, your sales stops, but your inventory, your capacity and your debts remain. When the world stops burning fossil fuels, the CO2 flow stops immediately, but the amount of CO2 in the atmosphere will continue to be there and contribute to the greenhouse effect.  This inertia of stocks is what makes them reliable, but also a hindrance.  Just being there already cost money, in warehouses, occupied cash, interest, etc. 

Dropping oil prices, from a stock & flow perspective

Oil capacity is quite stable

To understand the price drop we should be looking at capacity versus demand and not at supply versus demand, because demand and supply are the same and thus always have a ratio of 1. More precise, it is available capacity versus consumption.  Available capacity is total capacity minus war and minus boycotts. Capacities are quite stable because they are stocks: stocks of equipment, a portfolio of oil fields, a fleet of drilling rigs, oil in the ground. Only big events or enduring flows can change available capacity. Oil tanks are stocks, but moving oil tankers can be considered flows. Oil pipes are stocks (because it is equipment), while the oil in the pipes is a flow. Driving is a flow, but the tank in  your car is a stock.  Most people believe that Oil stocks are there to buffer availability and keep the prices more stable, but since many stocks start to move when the prices change, many stocks  de-stabilize. Oil trade makes the market more liquid, but speculation and herd behavior make the volatility worse.  Oil as a stock & flow issue is screaming for Flostock modeling. Give us a call (+31 6 11356703) if this is of interest to you. 

Alternative nine to the Flostock forecasting methods: Consensus Forecasting

Delphi method

This method is about getting a higher quality forecast by averaging the forecasts from different experts, made with different methods. Big advantage is that some biases and systematic errors will be averaged out; in that sense it is similar to crowdsourcing.  One example is the Delphi method, in which there are several rounds, with result sharing after each round, so the group works towards consensus.  An obvious problem with such open method is that the loudest voices will dominate, so it will not avoid herd behavior.  Another, more basic problem is that it is sentiment based, which makes it ‘linear’ by definition, thus overshooting at each ‘turn of the road’. This is because all variants of sentimental forecasting miss the non-intuitive effects of the Stocks as discussed above in Law 19.