Academic journal article The Journal of Business Forecasting

The Roller Coaster Ride of Volatility

Academic journal article The Journal of Business Forecasting

The Roller Coaster Ride of Volatility

Article excerpt

EXECUTIVE SUMMARY | One of the major problems in demand planning is volatility of customer demand, which can be caused by both internal and external factors. In this article, the author describes some of the sources of volatility, and offers ways to manage volatility.

One summer my good friends and I decided to drive to California's Six Flags Magic Mountain Theme Park. With 260 acres of rides and attractions, there was no shortage of activities to entertain us. Warmth was everywhere, distributed from the sun that shone brightly from its perch amongst a blanket of pale blue sky. Arriving just two days after the start of the school year, we were taken back upon entry: The Park was eerily empty. There were no schoolchildren to be found, and the adults apparently were using their new freedom to avoid the amusement park. At Six Flags, if you are going to go big, you have to go for the Viper - a 70 mph thrill ride that boasts 19 stories of elevation changes and the tallest vertical loop in the world (14 stories high). The walk to the ride was unusually quiet and progressed in apparent slow motion, with gentle smirks and nods as if we were astronauts approaching the space shuttle for a trip to save the world. Gaining access to the Viper usually requires patience as one waits through long circuitous lines that wrap around corner after corner, but that day there wasn't a single person in line or on the ride. The excessively bored caretaker of the ride opened the gate to allow us to enter, and each of us nodded with an expectant smirk and climbed into the very front row of the first car. In just moments, the roller coaster took off, accelerating steadily, soaking up the loops and spins. Adrenaline progressively drove everything from our minds except the anticipation of the next twist. One moment we were upside down, the next we were sideways, then vertical, then falling, all the while eyes open wide looking for what would be next. Each unexpected turn brought a new jolt of glee, singularly demanding our full attention. It's not as if we took joy in the unexpected but there was an undeniable, exhilarating rush of not knowing what was coming next.

Sooner or later the ride had to end. We hadn't had enough of the ride though, and after four consecutive trips on the Viper we stumbled away to find a park bench so that we could wait for our motion sickness to subside. Thinking back now on the experience, I can remember how unanticipated turns were exhilarating and nauseating at the same time. As a business forecasting and planning professional (you knew that I had to bring it up sooner or later), I have also experienced how wide swings in business demand can be as nauseating as a large-scale thrill ride - and just as in a tripon the big ride, one can't jump off or stop in the middle.

Business dynamics aren't choreographed or controlled like the turns of an ominous thrill ride. The dangers are real, and the nature of entrepreneurial competition amongst businesses both large and small is unforgiving. Failures in business forecasting are very costly and can destroy companies by driving exceptionally difficult manufacturing orders, by depleting available liquidity, and by wreaking havoc so deep that it kills some companies and permanently handicaps others. A company's ability to anticipate market demand and adapt to meet it constitutes foundational elements of a competitive advantage. In the business world, there is a real potential for taking an active part in steering the ride instead of passively going with the flow.

Now that you have shared a moment of visualization away from the mundane, we can come back to the discussion of the elements of volatility, how businesses often cope with volatility, and then review some opportunities to utilize controls that can lessen its impact. At LOUD Technologies, a world leader in the manufacturing and distribution of professional audio and musical equipment, we have spent recent years examining variances in customer demand patterns and the resultant effects on our supply chain. …

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