Flostock News#6 Absorbing Black Swans
Absorbing Black Swans
- Black Swans can be absorbed
Black Swans were described by Taleb in his great book with the same title. In a more recent book called Antifragile he adds that companies should try to be more 'Antifragile' , i.e. being able to benefit from volatility. The Flostock approach is the following:
Although Black Swans are by nature impossible to predict, once you see one, you can include him in your Flostock system dynamics Model. This allows you to analyze the effects of the Black Swan on your business. Next step is testing your responses in various scenarios. A company with a Model that absorbs Black Swans will thus become more Anti-fragile and benefit from volatility. A famous, nay notorious Black Swan was the panic after the bankruptcy of Lehman Brothers in 2008. DSM Coating Resins, as example, gained 15% market share based on a Black Swan-containing model in the period 2009/2011 and described it in an article in the ECJ.
Why better demand forecasting brings more profit
- Laocoon enjoying the benefits of forecasting
The benefits of a reliable forecast can best be described by listing the problems of NOT having it. These include missed business, firefighting, redundancies, stock-outs, loss of market share, under-utilization, sold-out situations, wasteful bickering in the hallways, loss of focus, meetings, speed deliveries, obsolescence, angry customers, too late investments, too early investments, complaints, unreliable communication to investors, higher transport cost, meetings, continuous reporting and explanation about why targets have not been met, sandbagging in sales forecasting, stress, disappointment, lack of commitment, meetings, more difficult to get approval for investments, sub-optimal sourcing of raw materials and more meetings. Quantifying these problems is difficult, but one wonders why any company can earn money without a Flostock model?
Fleets maintain an optimal age, according to Flostock’s Sixth law
- Aging fleets maintain optimum shape
We defined a fleet as a stock of any equipment that is used for a longer period. We can now add that any Fleet not only has a certain size but also a certain average age and that is because this is optimal for a reason. The invisible hand of the free market makes sure the Fleet is maintained around that optimal. When a crisis hits us, the place of the optimum may temporarily change.
But after the crisis, when things return to normal, the Fleet will return to its optimal size and age. Some examples: The famous Men’s Underwear Index says that men buy less underwear in a crisis; they let their boxers age. Flostock’s Sixt law says that this can only be temporary, and when the crisis is over, catch up demand will take place. Another example is the automotive fleet. When a population is uncertain about its economic future, it may decide to continue driving the old cars a little longer and the average age rises. For a while higher maintenance and lower status are less important than depreciation. Later the Fleet will need rejuvenation to get back to the original optimal average age.
Automotive dip explained by stocks & flows
- Car fleet as a stock & flow effect
The European car industry is worried about the declining sales, minus 20% compared with 2007. The explanation is quite simple.
The cars that were scrapped this year were supplied in the mid to late nineties, when sales levels were lower. Since the size of the European car fleet is already stable for ten years, all sales is based on replacement only. Thus the current sales level is equal to the nineties, and lower than in the intermediate period. Good news is that soon replacement of the high cohorts of the years 2000- 2007 will be due. In reality there are some more complexities. Call Flostock if you want to know which.