Do You Need an Early Warning System?

By Teplitz, Paul V. | The Journal of Business Forecasting Methods & Systems, Spring 1995 | Go to article overview

Do You Need an Early Warning System?


Teplitz, Paul V., The Journal of Business Forecasting Methods & Systems


Forty years ago, a group of construction crews ventured out into the empty, frozen tracts of the Arctic. Using the "high technology" of their day, they built a network of radar stations that could spot approaching aircraft from hundreds of miles away. This DEW Line (for Distant Early Warning) provided the U.S. and Canada with 3-4 hours' advance warning of a Soviet air attack. Today, newer technologies of attack and detection have long since overtaken the bombers and radars of the 1950s. But for millions of people, the DEW Line remains a symbol of the safety and added sense of control offered by early detection of approaching events.

The DEW Line idea translates well to business planning. Some companies have already built "early warning" systems to get an advance alert to changes in market demand for their products. Many more can benefit by doing so.

The DEW Line sounded its alarms for operational planners, not long-range planners. A few hours was far too little for choosing new weapons systems, but it was vital time for scrambling interceptors, moving people into shelters, and preparing a counterattack. In a similar spirit, the early warning systems we have seen in use by companies generally take a reading of the market a few weeks or months before the intended selling season. Based on this reading, they can scramble for more supplies of hot items, try to head off production of slow-movers, adjust prices, and generally manage operations in coming months with fewer surprises.

DO YOU NEED EARLY WARNINGS?

Many products don't need early warnings. For products such as chemicals, electric power, paper towels, corn flakes and aspirin, planners can construct reliable forecasts weeks or months ahead using standard computer programs.

For thousands of other products, such as new products, products with short and intense selling seasons, fashion products, or products whose value ends abruptly (seats on next Tuesday's 8 p.m. flight to London), these standard time-series models don't forecast well. These products have either too little history or too many unknown factors that influence demand. Companies face the daily challenge of matching supply with a highly uncertain demand and, inevitably, they often misjudge their demand at a considerable cost in shortages or oversupply. In these cases, an early reading of market demand can sharply reduce those costs, as in the following example:

A maker of branded apparel introduced a "fun" product unrelated to its regular line--a teddy bear. A mid-level manager came up with the idea, thinking customers might like to give it as a Christmas present. Others in the company liked the idea, but lacking any experience in the "stuffed animal" category, they wrestled with the question of how many to make. After some debate, they came up with a number everyone agreed was conservative and placed an order with suppliers.

By good luck, about a month later, the company conducted a customer survey on new products that included, among other items, this teddy bear. Customers "bought" the teddy bear at more than five times the forecast level. The company scrambled to increase supplies, and when Christmas was over, they had sold almost seven times the original forecast, for about $1.6 million. Without the early alert, managers felt they might have been able to supply about one-third of that amount.

Your own company's actions can wreak havoc with the balance between supply and demand. We've seen numerous cases where a marketing change, new distribution, international expansion, or a new strategic alliance led to major crises in supply or capacity. The companies either underestimated the strength of response or, more often, they simply had not thought through (or fully communicated) the operational consequences for all parts of the organization. In these cases, an early test of response would have alerted them to the need for better preparation.

Table 1 lists additional business factors affecting the value of early warning systems. …

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