Sales forecasting during the credit crisis

The work contained herein concerns the influence of supply chain dynamics in the effects of the (ongoing) international credit crisis. This project was carried out within Royal DSM N.V, a dutch life sciences and performance materials company. During the second half of 2008, DSM sales plummeted; sales levels across the board were falling to historical lows. This was a time of financial crisis with banks going bankrupt, consumer confidence dropping and fatalistic headlines covering most of the worlds' newspapers. Nevertheless, the unprecedented drop in sales was not aligned with the fluctuations seen at the end markets: some of these were dropping, but nowhere near the levels seen at DSM. During those uncertain times, it became imperative to understand the reasons of this dip in order to plan the necessary strategic actions. De-stocking hypothesis We have analyzed a series of research leads that ultimately led us to postulate a generalized de-stocking wave as the main cause of the appearance of an amplification effect throughout the supply chain. Companies were seeing progressively decreasing sales related to their position in the supply chain, this -the bullwhip effect- has been extensively analyzed in the operations research literature. The inherent structure of supply chains, information delays and inventory dynamics are used to explain the observed effects. Modeling the supply chain To test this hypothesis we have built -in January 2009- a system dynamics model of a representative supply chain within DSM NeoResins+. This model accurately explained the historical developments of the demand and produced a forecast, predicting a W shaped curve. When, during the first half of 2009, the actual developments of demand accurately followed the model forecasts, DSM NeoResins+ used this knowledge to institute several key policies; investments were continued and stocks started to be rebuilt ahead of the market pick up. Following the NeoResins+ success story, the rest of the company was invited to join the project and have supply chain models developed specifically for each group. These additional models have proved to be accurate when explaining the historical sales developments and the trends they forecasted. Each business unit used the insights within their S&OP processes during the duration of the crisis. Insights and learnings Every business unit should know and track their end markets. Business intelligence efforts should not be limited to understanding the developments of the markets they sell directly to (e.g, resins) but they should understand and follow the markets where consumers actually buy them (e.g, Automotive). Analyzing consumer market developments with the benefit of hindsight, we can identify enough early signals that (had they been understood) would have afforded the company a strategical advantage in dealing with the advent of the crisis. Inventory dynamics have had a strong influence on the world economy as a whole. Little research is available on the subject of extending supply chain and inventory theories to the global scale and government statistics are severely lacking in this area. There is a great opportunity of untapping this potential knowledge. Investments in the area can directly lead to gaining a strong competitive advantage both in a local and global scale. Individual decisions taken by a company cannot affect the behavior of the supply chain. Communication throughout the whole chain is needed to mitigate the effects of a crisis, DSM is in a position to become leader in these strategical communications and benefit from the advanced knowledge of business developments and the subsequent increased reliability in forecasts. The supply chain models, used in stable times, can help differentiate between real business growth and stockpiling over the chain. This knowledge is critical for accurate strategic and capacity related decisions. Finally, the research efforts required of the business units during this project have effectively increased their own understanding of their supply chains and end markets. Internal awareness of the effects of these in their day to day operations have increased tenfold. Furthermore, the existence of duplicate market analysis efforts in different business units has been exposed. Many business units share final markets but do not share the data and analysis. There is a unique opportunity for the creation of synergy between sectors; not only can resources be shared but insightful discussions should be encouraged.