Goldratt on forecasting

While it is always hard to argue with Eli's logic and I generally agree that a small drop in GDP should not grossly affect sales volume there are other factors at play which Eli appears to ignore in this paper...

(1) Propensity to Save

The last decade has been remarkable in certain countries by the lack of personal/domestic saving. Folks tended to rely on wealth creation from property and stocks (in pension plans) for their retirement. Both have been heavily damaged by the recent bubble bursting. Domestic savings need to increase dramatically. This will affect retail demand particularly for high ticket items that don't need to be replaced e.g. cars.

(2) Currency changes

The US Dollar and the British Pound particularly have decreased dramatically in value making imports much more expensive. This affects the price of imported goods and will again affect retail demand in these economies.

Meanwhile, the Japanese Yen has appreciated in value dramatically but the Japanese do not spend a lot of money in retail stores on imported goods. One winner might be the Scotch Whisky industry whose sales in Japan may do better.

The trends in currency valuation are not short term. The whole market will need to adjust to a strong Yen, a strong Euro and a weak Dollar and Pound.

(3) Market Liquidity / Banking Propensity for Risk / Credit Availability

The end of 2008 saw a dramatic re-assessment of the capital banks need to keep on-hand against funds lent. Most of the 2008 bailout funds went to re-capitalizing banks and relveling their risk exposure rather than on lending to the market. As a result 2009 and beyond is a world of significantly less liquidity and significantly less credit availability.

This represents a dramatic contraction in available funds for companies to float inventories and supply chain credit and for consumers to spend in retail stores.

All 3 of these factors seem to indicate that the downturn in retail sales will be significantly worse than the drop in GDP and prolonged much longer than required time for a shock to propagate through the supply chain.

In my opinion, the winners in 2009/2010 will be firms that adjust their processes to run on very low inventory with very fast turns (short lead times), coupled to increased customer intimacy. Firms that have a better grasp of what consumers will buy and at what price point while having the infrastructure/supply chain to react to these market demands will be the winner.

I believe that Eli has the tools in his toolkit to really help firms manage the crisis but that the material in this article isn't it. A conspiracy theorist might suggest it was deliberate misdirection. Knowing Eli a little I don't believe he thinks like that, so I find this article surprising. I have observed him think things through more deeply than the depth I see here.

David

I have read The Critical Chain during my studies in project management (international project coordinator). I am intrigued how ToC could be found at every company as one of the most important keys to success.

Right now I am working on a piece for Open Forum site (American Express) on different indexes as forecasting tool. As a follow-up post, I will look into the Purchasing Managers' Index in more detail.

All the Best,

Martin Lindeskog - American in spirit.
Gothenburg, Sweden.