After the Kick-off – “Early” indicators for 2014

The Sales kick-off went quite well. Now is the time to take one more look at what 2014 looks like from the vantage point of forecasting before real constraints set in.

Economic forecasters have long utilized ‘leading’ and other “indicators” as a barometer to predict where the economy will be headed in the future. Inspired, we have pulled together the following ‘early’ indicators that can provide useful ingredients in influencing if not generating a Company’s forecast. While all forecasts are off, early indicators can be used to understand the ‘trajectory’ and a portion of the variance in the forecasts that is otherwise hard to estimate.

Here are some early indictors and macro-data[i] as you craft your forecast for 2014.

Early indicators – the Macro

Weather events & the US – Climate .. or at least the weather took center stage early in January as temperatures plunged in vast swaths of the US disrupting life and business. The near term effects have been significant but not severe. The initial price tag of the big chill is placed at $5Billion (as of early January 2014). Doesn’t appear devastating given nearly 200 Million people were affected. However, long-term effects should be lesser to none.

The good news – the US economy turned in a fair 2013 (3.2% GDP growth in Q4, 2013 versus 1.9% for the year) and early indicators suggest 3% for 2014. In the near-term the US certainly seems to be back on track, and maybe at the wheel in terms of driving the global recovery.

Estimated Impact – Of storm – Near-term only (3 weeks to 2 months); US Growth – stable for 9-12 months[ii]

Emerging markets – Short-term growth prospects have been hurt. Turkey made headlines with an egregious interest rate hike in January. However, emerging market countries as far-flung and diverse as Argentina, South Africa, Indonesia and India seem to be facing stiff economic headwinds too. Brazil seems drawn into a stagflation, just months from the big kick-off!

Estimated Impact – Near to Mid-term (9 to 18 months depending on markets)

China’s growth phenomenon – China’s slowdown has arrived per data and economists – 7.7% GDP growth in 2013 Year-over-Year, versus 7.8% growth the year before.  While debate is split about future direction of this important market, all data points to a gradual deceleration and not an absence of growth. Structurally, data regarding the supply-side limits are cause for bigger concern (China’s working age population fell by 2.44 Million in 2013 after falling the year before – The Economist Jan 25^th 2014).

Estimated Impact – Near to mid-term slower growth (10 to 12 months); Longer-term growth could be adversely impacted.

Japan and EU – These key developed markets still seem to be stuck in neutral with dangers of deflation not gone.

Estimated Impact – Tepid growth. Foggy at best for the next 6-9 months

Housing starts – A key “leading” indicator of future economic activity is in positive territory in the US, Germany and England (Jan 2014 compared to a year ago).

Estimated Impact – Could imply some progress for Construction and related businesses (home products, home solar products, other home/consumer products).

Early indicators – the Micro

New orders and new customers – Both are good early indicators

Orders for new products –are valuable early indicator, especially for industries such as the Hi-Tech electronics industry that rely heavily on new products for significant portions of their revenue stream. For example, for the Wireless networking industry, how are the orders coming in for the 11ac products (based on new networking standard) and how are the prices trending.

Inventory (especially Channel Inventory) & lead-times – are key early indicators. While channel inventories are typically co-managed, tracking this can provide valuable clues.

Backlog – A very good gauge in the near-term to establish revenue trend. However, this needs to be taken with a pinch or heaps of salt. Why? This depends on how effective are your supply chain fulfillment operations.

And that’s where the rub is – since some of these indicators depend on a ‘healthy forecast’ so we are back to the ‘chicken and egg’ problem.

These are a few of the key ingredients to consider as ‘early indicators’ in updating or building your forecast – at least for the mid-term: 0 to 6 months.

Overcast or Sunny? For those who dare to Forecast

Even with the best processes and systems the age-old truth holds – All Forecasts are incorrect, especially at the get-go. However companies can disproportionately benefit if they:

i)                   Include ‘early indicators’ in the forecasting process in a simple way

ii)                 Make Forecasting (the process) one of the book-ends of the Demand Planning process, which flows seamlessly as a part of the overall Sales & Ops Planning and execution process

And yes, lets plan to loop back after the proverbial dust has settled on the quarter (or, quarters) to figure out how far off was the Forecasted Demand. And while we are at it.. why not find out why, and how the indicators have changed. As the adage goes..

“Forecasting is the art of saying what will happen, and then explaining why it didn’t! ”

-Anonymous