Flostock News#2 Green shoots in the economy

Early signs of an economic recovery

Intention anticipates behavior. Consumer sentiment improves before retail turnover increases. And permit requests anticipate construction spent. When looking carefully at the European scene, a few early signs of an impending economic recovery are visible. Over the last few months we have seen the following positive signals:

* Slightly more mortgage applications are filed. House prices are not going down as fast any more.
* Consumer confidence is stabilizing, and more important, consumption went up a notch recently
* Gold price is going down
* Stock markets are going up
* Car sales are slightly recovering
* Demand for temporary labor is increasing.
* Entrepreneurs in German and The Netherlands are getting more optimistic
* Many companies showed improved results in Q1 compared with Q4.
* Industrial Production in Europe went up 1% in March 2013, the first time in 2 years.

Although each of these signals in isolation does not mean too much, and although each signal could turn into its opposite the next month, the total list does give hope that the European economy is recovering. When confidence returns, retail consumption returns. As a result inventories in the pipeline will be filled again. Industrial production starts growing and finally demand for capital goods will take off.

Risk reduction in M&A with a new way of demand forecasting

The most important, and most uncertain, element of value determination during an acquisition project is the estimate of future revenues, and more in particular its volume part. This is especially difficult for commodity or highly cyclical businesses. In company valuation, it is essential to understand which part of recent growth or decline is due to end market developments, which part is accounted for by stock building, and which part stems from a gain in market share. Only market share gain shows the real strength of the company. The end market and the market share trend curve can be extrapolated into the future. The inventory wave can be calculated, and then the three factors added up again.
Flostock supports venture capitalists, private equity investors, banks and principals in mergers and acquisitions by creating a reliable demand forecast of an acquisition candidate, starting from key economic indicators for their true end markets. Click here for a brochure.

Amplitude of the Inventory Wave is proportional to Stock Depth, according to Flostock’s Second Law

Companies maintain stock proportional to their turnover, because they need inventory to maintain the sales flow. When demand goes up, inventories go up, and oppositely when demand goes down, inventories go down. This creates an Inventory Wave which is super-posed on top of the basic demand curve. Flostock’s Second Law states that the total inventory in the chain, the so-called Stock Depth, is proportional to the amplitude of the Inventory Wave.

The inventory amount of one company is generally described as inventory coverage: enough stock for a number of days’ sales. Knowing how many companies are in the supply chain between you and the end market, and when you are able to estimate the stock coverage in each intermediate firm, you can calculate the total inventory coverage of the chain. From the perspective of the basic industries this so-called Stock Depth can be as long as a whole year. In an example: when end market consumption grows 4%, the whole chain wants to grow their stocks 4 % to maintain the desired coverage. If your Stock Depth is 9 months, this will result in another 3 % of a year in extra sales to build up the inventory in the chain.
In Flostock News #1 we described the First Law, which says that the Supply Chain is a tube. The Third Law, which says that the Amplitude of the Inventory Wave is proportional to the change in growth, will be described in Flostock News #3. If you want to know more, give us a call or send an email to info@no-spam-today-flostock.com.

Modeling gave DSM Coating Resins a competitive edge in the crisis

In two articles DSM Coating Resins looked back at a remarkably good forecast accuracy over a 30 months (!) period and described that they had gained 15 % market share in coating resins and 500 million euro extra turnover in a two year period. In the articles, which appeared in the European Coating Journal in 2010 and 2011, DSM Coating Resins described how they used a supply chain model (the predecessor of the models now offered by Flostock) to analyze, understand and forecast their demand during the economic crisis. The articles explain how the business unit included the so-called Lehman Wave the composite bullwhip that rampaged the global industries in 2008 -2010, in its forecasting model, reaching a forecast accuracy of more than 94 %, 30 months (!) into the future.

A Unique Concept for Company Evaluation

Flostock recently issued a new brochure about company valuation for mergers and acquisitions.

Download it as PDF here.

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