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Re-aligning plans to reflect reality: The importance of forecasting in the coronavirus crisis

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Re-aligning plans to reflect reality: The importance of forecasting in the coronavirus crisis

By Debbie Bowen-Heaton, Partner at Oliver Wight EAME 

The last few weeks have drastically reinforced to many businesses, the need to truly understand the demand patterns of not only their customers but also their customers’ customers. Whilst some businesses have completely flatlined, others have found themselves overwhelmed by a surge in demand (often purely as a result of consumer’s panic buying). This has put into sharp focus, the absolute necessity for businesses to be able to predict when this type of peak in demand is likely to happen and to have the planning processes in place to enable quick, responsive and effective decisions.

Those businesses that are riding the current storm effectively, all have a strong demand monitoring process in place that allows them to capture actual demand as it occurs and then compare this to expectations and typical levels of demand variation. Top-performing businesses monitor demand on a monthly, weekly, daily and hourly basis, but also have their eyes and ears on the ground – ‘demand sensing tools’- to understand the root-cause of changes in demand patterns, and an efficient means of communicating business intelligence changes as they occur. Demand sensing capability delivers a superior customer experience in terms of product availability leading to increased service levels, whilst simultaneously reducing inventory costs and maximising profits.

Vitally,a key characteristic of a successful organisation is that their demand plans closely align with their financial plans. Traditional annual budgets for this year are, for the majority of businesses, now largely irrelevant. Assumptions made in the annual financial plan will likely not have considered COVID-19, hence the need for a rolling financial forecast driven by demand – without this the numbers and assumptions for the rest of the year will be completely unrealistic.

For finance, it is not simply a case of reporting the numbers, their role focuses on providing the analysis behind those numbers. How does the financial performance relate to the plans that were reviewed and approved previously? Which assumptions were proved wrong? This requires close coordination with the demand team to ensure that evaluation of the financial measures lines up with root cause analysis on measures such as aggregate demand plan performance and forecast accuracy.

When it comes to assessing opportunities and vulnerabilities for demand, the financial implications must always be determined to ensure that the business is focusing on the right areas. Finance should consolidate all the inputs received, critiques and analysis, identifying gaps to financial commitments – this year’s budget, next year’s targets and further out over the company’s planning horizon. Its task is then to support the production of gap-closing recommendations with robust financial information. These suggestions go on to inform the wider demand review process.

Organisations where these processes are not working alongside one another as part of an integrated business planning process, or that lack the processes altogether, have found it much more difficult to adapt to the rapidly changing demand caused by the COVID-19 pandemic. In one example, an organisation we worked with which provides essential equipment to health services around the world, experienced a significant bulge in demand for many of its products. It was clear that although the company had some demand planning capability in place, the process was inadequate in terms of monitoring and managing the short-term demand. Consequently, it found itself operating in crisis mode. It was even at risk of sending products to low priority customers instead of those healthcare providers who desperately need its products for patients suffering with coronavirus.

The team had not allocated sufficient dedicated resource to manage the short term, including updating the assumptions or the demand plan on a weekly basis. Decision-making rights and market/customer priorities were not clear, despite this being essential information to help the company decide which customers to prioritise when there is a shortage. A review and development of the process, role descriptions, prioritisation mapping, and alignment on where decisions should be made, was all that was required to leave the team feeling much more confident it could manage the business effectively going forward and prioritise the right customers during the coronavirus crisis.

Looking to the future, it is impossible to ignore the importance of technology when it comes to accurate forecasting. Some businesses are already harnessing the power of AI, IoT and Big Data to respond in record time, more accurately anticipate future demand and gain a truly competitive advantage – by not just meeting customer demand but predicting it. Data analytics can quickly, efficiently, and effectively translate thousands of data points collected on consumers into deep insights that allow companies to get to know their customers better than they know themselves. This helps to predict future behaviours and develop plans and processes to respond quickly to potential changes. Those businesses utilising this technology to its full potential have been left in a better position to adapt to the unexpected demand caused by the pandemic, and could serve as a lesson to other businesses in being better prepared for the next unexpected event.

For more information, Oliver Wight have produced a white paper on the topic of demand sensing and execution, which can be downloaded for free here

 

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Oil prices steady as lockdowns curb U.S. stimulus optimism

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Oil prices steady as lockdowns curb U.S. stimulus optimism 1

By Noah Browning

LONDON (Reuters) – Oil prices were steady on Monday as support from U.S. stimulus plans and jitters about supplies competed with worries about demand due to renewed lockdowns to prevent the coronavirus from spreading.

Brent crude futures for March rose 7 cents, or 0.1%, to $55.48 a barrel by 1210 GMT. U.S. West Texas Intermediate crude for March was up 5 cents, or 0.1%, at $52.32.

“Sentiment was buoyed by expectations for a blockbuster coronavirus relief package … (but) the tug of war between stimulus optimism and virus woes is set to continue,” said Stephen Brennock of broker PVM.

U.S. lawmakers are set to lock horns over the size of a $1.9 trillion pandemic relief package proposed by new President Joe Biden, financial stimulus that would support the economy and fuel demand.

European nations, major consumers, have imposed tough restrictions to halt the spread of the virus, while China reported a rise in new COVID-19 cases, casting a pall over demand prospects in the world’s largest energy consumer.

Barclays raised its 2021 oil price forecasts, but said rising cases in China could contribute to near-term pullbacks.

“Even though the pandemic is not yet slowing down, oil prices have good reasons to start the week with gains,” said Bjornar Tonhaugen from Rystad Energy.

Supply concerns have offered some support. Indonesia said its coast guard seized an Iranian-flagged tanker over suspected illegal fuel transfers, raising the prospect of more tensions in the oil-exporting Gulf.

“A development that always benefits prices is the market turbulence that conflicts create,” Tonhaugen added.

Libyan oil guards halted exports from several main ports in a pay dispute on Monday.

Output from Kazakhstan’s giant Tengiz field was disrupted by a power outage on Jan. 17.

(Editing by David Goodman and Edmund Blair)

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Dollar steadies; euro hurt by vaccine delays and German business morale slump

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Dollar steadies; euro hurt by vaccine delays and German business morale slump 2

By Elizabeth Howcroft

LONDON (Reuters) – The dollar steadied, the euro slipped and riskier currencies remained strong on Monday, as currency markets were torn between optimism about U.S. stimulus plans, and the reality of slow vaccine rollout and the economic impact of lockdowns in Europe.

Market sentiment had turned more cautious at the end of last week as European economic data showed that lockdown restrictions to limit the spread of the virus hurt business activity, dragging stocks lower.

The safe-haven dollar declined gradually overnight, and riskier currencies strengthened. It then recovered some losses after European markets opened, and was at 90.224 against a basket of currencies at 1152 GMT, flat on the day.

On one hand, market sentiment is supported by hopes for President Joe Biden’s $1.9 trillion fiscal stimulus plans, as well as the expectation that central banks will continue to provide liquidity.

But, in Europe, the extent of the risk appetite was limited by a lack of progress in rolling out the COVID-19 vaccine as well the economic impact of lockdown measures.

German business morale slumped to a six-month low in January, surprising market participants who had expected the survey to show a rise.

“It’s very much a case of hopes for the future against the reality of the first quarter of this year which is going to still prove to be fairly troubled,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

“For now at least, the optimism that we’re hoping for has been somewhat delayed and that has taken a little bit of steam out of the euro and just put a little bit of support back in the dollar but ultimately I think it is still a case of those high-beta commodity currencies, reflation currencies, will continue to perform well,” he said.

Analysts expect a broad dollar decline during 2021. The net speculative short position on the dollar grew to its largest in ten years in the week to Jan. 19, according to weekly futures data from CFTC released on Friday.

The U.S. Federal Reserve meets on Wednesday and Fed Chair Jerome Powell is expected to signal that he has no plans to wind back the Fed’s massive stimulus any time soon – news which could push the dollar down further.

“The process of tapering QE is likely to be a gradual process which could last throughout 2022, and then potentially be followed by the first rate hikes later in 2023,” wrote MUFG currency analyst Lee Hardman.

“In these circumstances, we continue to believe that it is premature to expect the US dollar to rebound now in anticipation of policy tightening ahead, and still see scope for further weakness this year,” he said.

The euro was down around 0.1% against the dollar, at $1.2153 at 1207 GMT. At the European Central Bank meeting last week, President Christine Lagarde said the bank was closely watching the euro. The euro surged 9% last year versus the dollar and reached new two and a half year highs earlier in January.

But despite this verbal intervention, traders remain bullish on the euro, expecting the bar for a rate cut to be high.

Elsewhere, the Australian dollar, which is seen as a liquid proxy for risk, was up 0.2% at 0.7726 versus the U.S. dollar at 1208 GMT.

The New Zealand dollar was up 0.5%, while the commodity-driven Norwegian crown was up 0.2% the euro.

The safe-haven Japanese yen was flat on the day at 103.815 versus the U.S. dollar.

Graphic: USD, https://fingfx.thomsonreuters.com/gfx/mkt/qmypmyjdxpr/USD.png

(Reporting by Elizabeth Howcroft, editing by Ed Osmond and Chizu Nomiyama)

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Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

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Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 3

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.

Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.

Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.

“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.

The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.

“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.

In an emailed response to Reuters, a Hong Kong government spokesperson said: “In the light of the evolving pandemic situation locally and internationally, the Government will keep reviewing and refining the arrangements applicable to different categories of exempted persons, including air crew, with reference to all relevant considerations.”

Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.

The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.

In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.

(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr, Arun Koyyur and Mark Potter)

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