Flostock News #4 Strange waves & volatility

Do you observe a strange wave in your sales since 2009?

: Strange waves?

Several Flostock customers are reporting a strange wave in their sales pattern with a wavelength of 10 – 15 months and an amplitude of some 5-10% sometimes even more. In some cases this wave was not visible before the Lehman crisis. Flostock has found the cause and can predict it’s path.

The wave becomes clearly visible if you take the rolling average of your monthly figures over, say, the last 5 years. It looks like seasonality, but it does not necessarily coincide with the seasons. We have found that this wave was kick-started by the global destocking that took place during the credit panic after the Lehman bankruptcy. Already in 2009 we gave this wave the name “Lehman Wave”. In some industries the Lehman Wave was dampened quickly, but elsewhere we have found that it has already been waving for 5 years. The difference can be attributed to instability of the supply chain and can be modeled in the system dynamic models of Flostock. Inspiration for this explanation was new, refreshing research by Maxi Udenio of the University of Eindhoven. Call us if you want to know more.

Demand for capital goods follows the first derivative of demand for consumption goods, according to Flostock's Fourth law.

: Consumption (red) and Capital Goods (blue)

When analyzing product demand, a distinction should be made between consumption goods, like toys and clothes and capital goods, like machines and trucks. Capital goods can be defined as goods that are used to manufacture consumption goods. Demand for capital goods can again be split in demand for growth and demand for replacement (which will be discussed as law 5 in the next newsletter). Demand for growth means the production capacity needs expansion. If the production capacity grows at a constant rate, growth-demand for capital goods is stable. If production capacity is constant, growth-demand of capital goods is zero. If there is overcapacity, growth-demand of capital goods is negative. In the small figure next to this text, red is demand for consumption goods and blue for capital goods. This effect is equivalent to the mathematical expression that growth-demand for capital goods is “the first derivative” of demand for consumption goods. This law may seem trivial or overly mathematical, but it has important implications.

Growth demand for capital goods goes through a peak when the demand for consumer goods merely goes through its inflection point: thus much earlier in the economic cycle. For the same reason temp labor suppliers like Randstad always claim they are early-cyclic, as if they are leading. In fact they are not: they are just the first derivative of the main cycle.

Another implication is in a country like China: China has grown strongly over the last 25 years, but mainly in capital goods for the own industry and export of consumer goods. When the export growth slows down (so it is still growing, only slower), Chinese production of capital goods will decline strongly.

You can read more in the blog about this.

Green shoots in the European Economy

: Don't shoot the green shoots

It is with pleasure that we again report about the green shoots that can be seen in the European economy. Actual behavior, like e.g. retail buying and Industrial production are stronger indicators than a sentiment, like PMI or consumer confidence. These are the green shoots:

a. Consumer confidence, though still low, has been improving for the 8th month on a row.

c. Prices of houses are stabilizing.

b. Retail in Europe is going up already for five months, according to Eurostat.

d. Export of Greece, Spain and Portugal is growing strongly as they have become much more competitive.

e. 7 of the 10 most Innovative Countries in 2013 are European.

f. World trade volume is rising steadily.

g. Industrial production in Europe has resumed growth, according to Markit Economics’ PMI and according to Eurostat.

h. Construction volume has been growing for 3 months on a row, according Eurostat.

The green shoots are becoming so clear that now also notoriously pessimistic people like journalists (“good news is no news”) are reporting a certain recovery of the economy. Stock markets already knew.

First part of product life cycle modeled during internship

The first part of the Product Life Cycle, a.k.a. product introduction, has now been modeled ingenuously by Oliver Handel, master student at Radboud University, during his internship at Flostock and he integrated it in the supply chain models of Flostock. In fact, he "nested" the introduction module at several steps of the supply chain. The Special Issue on Supply Chain Management in the System Dynamics Review 2005 summarizes that this issue has been plaguing firms in innovation driven industries for years and is often ignored in conventional SCM research. Oliver developed a demand framework, helping to forecast long-term demand behavior. The framework is designed to deal with the diffusion processes of innovative intermediate products, starting from the famous Bass-Diffusion-model. The developed framework was successfully tested with a case study from DSM Food Specialties.

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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