Controlling Volatility
Certainty in an Increasingly Uncertain World
Mitigating market volatility risks has become a boardroom concern across the globe. For the foreseeable future, we can count on living in an increasingly volatile world. Though market volatility is beyond the ability for individual companies to control, it is possible to control the effects of volatility with new forecasting technology.
New algorithms to automate real-time processing of masses of data and to extract meaningful information from the noise now provide the means to control the effects of volatility. Lightening your inventory footprint through better forecasts reduces risk in several key areas, the largest of which is demand uncertainty. This represents a new frontier and has become what might be the most influential lever available to control volatility risk.
| Primary Impact | |||
|---|---|---|---|
| Risk | Mitigation Strategy | Finance | Supply Chain |
| Demand uncertainty | Demand sensing | Yes | |
| Interest rates | Inventory reduction | Yes | |
| Commodity prices | Hedging | Yes | |
| Commodity Availability | Sustainable farming, packaging, etc. | Yes | |
Demand Uncertainty
Global market volatility makes forecasting even more challenging. Changing consumer preferences and retailer requirements, increased supply chain complexity, shorter product lifecycles, natural disasters and uncertain financial markets combine to create demand uncertainty. Forecast error for the consumer packaged goods industry is almost 50% - surprisingly high given the number of billion dollar brands and high-volume products. Traditionally, risk associated with uncertain demand is mitigated with safety stock, but this comes with a significant overhead costs. Leaders are taking steps to reduce the overhead by using real-time information from their network and from retailers to sense demand and reduce forecast error by 40% or more. Armed with better forecasts, companies are safely eliminating excess inventory, freeing up capital and creating a sustainable supply chain.
Interest Rates
With its high capital requirements, the inevitable rise in interest rates is a considerable financial risk. Though currently at historic lows, the inevitable rise in interest rates will make capital more expensive, increase the costs of most raw materials and erode profit margins. Mitigation strategies vary by time horizon. For long-term horizons, companies look to plant and fixed asset ownership. For mid- and near-term, the most effective mitigation strategy is to eliminate excess inventory since interest rates directly impact short-term financing costs for goods held in inventory.
Commodity Prices
Manufacturing is particularly susceptible to fluctuations in commodity prices. A surge in commodity pricing can raise end product prices, reduce profitability or result in loss of market share to a competitor. Hedging costs also tend to move dramatically in such situations and accurate demand sensing can help cut these costs.
Commodity Availability
Interruptions in availability can disrupt manufacturing and result in unplanned reformulation or discontinuation. As resource availability becomes more uncertain, leading manufacturers are concluding that operations cannot scale to meet the needs of another 3 billion people with “business as usual”. These companies are looking at both long-term programs (such as sustainable farming practices or watershed management) and short-term programs (like reduced packaging materials and waste reduction).