External Signals

The Key To Future Success During Black Swan Events

The world has changed, and many business leaders are grappling with what they should do moving forward to be better prepared for unforeseen external events. From a business planning perspective, one key lesson that can be taken from the Covid-19 pandemic is the need to constantly monitor external signals that may indicate potential changes to business performance. Business leaders can no longer rely on forecasting systems and processes that only look internally. Rather, companies must incorporate external consumer, economic and industry activity, data and signals into their forecasting plans.

While looking externally has always been critical to accurate forecasting, it is likely that the Covid-19 pandemic will change the economy in new ways that make external data even more important. Unsurprisingly, certain industries will be impacted by the pandemic to a greater extent than others, in turn leading to a shift of spending and the resultant demand for all products and services.

For example, we can typically project things like leisure and travel spending with significant accuracy using advanced economic indicators such as real average hourly earnings and spending on basic household goods, followed by luxury items and then big purchases, such as going on cruises.

According to McKinsey, tourism will not return to pre-pandemic levels until 2024, and the industry will need to rediscover the right signals to help forecast demand. However, other, perhaps less obvious, industries will be impacted as well.

Business leaders will also have to look carefully at supply-and-demand changes for industries like industrial packaging manufacturing as market dynamics shift. The inventory-to-shipment ratio of manufacturers is a great clue as to future demand, with historically long lead times.

Although this relationship may change, manufacturers of industrial packaging can collect this data on a monthly basis to adjust their forecasting models and better understand upcoming demand changes.

Every business has its unique set of signals, clues and indicators that can provide critical insight into changes in demand. It becomes all the more important — and valuable — to monitor these in a struggling economy.

Here are five steps we recommend to our own customers to help them gain more insight and better leverage relevant demand signals:

Step 1. Identify macroeconomic drivers that are distinct to your business and signal continued decline or improvement in macro conditions.

In the current environment, macroeconomic factors to watch may include Covid-19 cases by region, travel and tourism cancellations, vehicle miles traveled, online sales activity, weekly unemployment claims, and crude oil price.

These are followed by monthly signals, including real average hourly earnings, real consumer spending, logistics via the Cass Freight Shipments Index and big-ticket purchase items, such as luxury items, automotive and real estate.

Step 2. Identify industry drivers and the corresponding lead time to shifts in industry demand. 

These will vary according to industry. For example, if automotive is an end-use market for a company’s products, it may watch industry-specific factors such as the auto inventory-to-sales ratio, auto loan rates, PPI steel and other raw materials, and consumer purchase intent for automotive in next six months.

Step 3. Use internal historical data by major business area or product category to narrow down your company-specific reactions to market changes.

One of the most significant learnings of the unusual economic situation this year has been the varying impacts of the recession, not only based on locations and industry, but even on product categories within a business. While this year may be a more extreme situation, it has highlighted the need to understand how specific products or areas of a business have performed as a result of market fluctuations. As an example, an electronic retailer may find that headphone sales correlate with travel, which is down this year, but sales of home theater systems have grown.

Step 4. Set up an automated and systematic way to deliver insights to business leaders and decision makers.

Tracking the right economic drivers and internal and external data will prove fruitless if the data is not organized so that insights can be easily pulled — in real time — to help business leaders make decisions. Create the architecture and processes that consistently deliver information to business leaders in a useful format that yields actionable insights. Decision makers shouldn’t have to spend time trying to decipher raw data or relying on delayed data.

Step 5. Create a repeatable cycle for automating and evaluating potential scenarios.

To build on the above point, this process cannot be a one-time analysis and plan. It is essential to create a structure for automating data on a regular and repeatable basis and developing the most likely scenarios so that when the market reacts to an unanticipated event, there is already a plan in place. Leaders are now better positioned to quickly make decisions based on the most accurate and recent information.

When the economy is weak, volatile or uncertain, it becomes all the more important for business leaders to accurately predict demand. Critical accurate forecasting is identifying which economic indicators are triggers for a specific industry or business and combining that external data with internal data so that any changes can be spotted and planned for well in advance.

Originally posted on Forbes