Weather analysts, economists and reporters have a lot to say about the drought in California, as they should. The agriculture sector alone lost $1.8 billion in 2014 and advanced manufacturing and textile industries are experiencing major delays and setbacks due to the lack of rain in the region. Even the Panama Canal is now restricting the size of ships due to historically lower water levels.
As analysts continue to watch the “Godzilla” El Nino, which is anticipated to wreak havoc on the west coast this winter, one fact rings true for global manufacturers: companies must take into consideration how such severe weather impacts their bottom line. By understanding how external weather conditions, such as rising or dropping temperatures, winter storms and flooding, impact business performance, companies can take more proactive measures to better predict sales and demand fluctuations, improve internal efficiencies and plan for “what if” scenarios.
A clearer picture of sales and demand
Today, many companies are creating sales forecasts in hindsight, using internal sales data from previous years to predict upcoming business performance. Without taking into account how external weather conditions and other performance drivers can impact customer demands, companies will only see a portion of the puzzle behind what’s driving monthly sales. In fact, according to a Harvard Business Review study, 85 percent of a company’s performance is the result of external factors.
However, the benefit of incorporating external data into forecasts is proven. Manufacturers that identify leading indicators average greater than 5 percent higher return on shareholder equity than those that don’t, according to Gartner research. By optimizing inventory and working capital management, as little as a 1 percent improvement in forecast accuracy can be worth millions for the typical manufacturing company.
Having internal sales data is crucial for businesses to create accurate quarterly forecasts. Yet, when this data is combined with information about how external weather conditions and other factors play a role in customer sales and demand, the outcome creates powerful intelligence that businesses can act on proactively to improve their bottom lines.
Improved operational efficiencies
An important outcome of improved sales and demand forecasts is the ability to efficiently structure internal operational processes in a way that saves time and money. Few companies look to external factors to help determine inventory and staffing needs, relying only on internal historical performance metrics and gut feel to drive supply chain decisions. Yet, external drivers such as changing weather patterns have a huge impact internal operations – from the ability to run machines to shipping and receive materials and keeping up with customer demands.
Not only does weather impact demand, but it also can significantly delay the arrival of supplies that are necessary for manufacturers to stay on top of deadlines. Understanding the impact of weather on shipping and production helps supply chain managers plan for varying scenarios – such as snow storms that cause road closures to heat waves that slow operations – and take necessary precautions to avoid setbacks and facility shut downs.
Foresee market threats
Integrating external factors about the weather into internal forecasts will also help companies determine potential market threats and drive smarter decisions about how to manage risks in the form of “what if” scenarios.
For example, construction products and drainage material manufacturers are heavily reliant upon the construction timelines in the regions where they operate. Since drain construction takes place at the beginning of a housing or building timeline, any delay or alteration of construction timelines has a direct impact on the product sales of such manufacturers; whereas door and window manufacturers are highly dependent later in the construction cycle. Being able to better predict these delays and knowing exactly what impact they have on the manufacturing business allows companies to better meet fluctuating demands.
For example, one manufacturer with similar needs to predict the impact of weather on performance identified how changes in the average amount of rain in a certain region directly impacts its product sales. The company determined that any above average rainfall had a negative impact on monthly sales. By incorporating this information into its risk analysis and monthly forecasts, the company is able to make necessary adjustments to improve operations during periods of lower demand. This kind of understanding gives businesses a complete view of enterprise activity, providing the insight necessary to avoid setbacks and better manage economic risks.
Is your company prepared?
According to KPMG International and the Economist Intelligence Unit, most public company quarterly forecasts are off by 13 percent, which translates into $200 billion in lost revenue annually. These inaccuracies are the result of companies creating sales and demand forecasts and managing supply chain and production using incomplete information.
Armed with the right set of indicators about how flooding, droughts or winter storms can impact business performance, companies can anticipate fluctuating demands, proactively manage staffing and inventory needs, identify potential risks and plan for “what if?” scenarios with unprecedented certainty.
The drought in California has been the worst to hit the region in more than 1,200 years. Without question, the outcome of El Nino is sure to have an impact on the global economy. Is your company prepared to deal with the aftermath?
Rich Wagner is president and Chief Executive Officer at Prevedere.