Week 7: Best Practices 6

Ch6 The Early Warning System: Radar for Business

Chapter Opening Questions

A manager needs to develop an early warning system that includes:

• Macroeconomic Warning signals

• End-user information

• Customer sales forecasts

• Critical costs

Summary

Managing through the Business Cycle

Steps	Description
macroeconomic warning signals	The early warning system should include indicators for the overall economy and the relevant industry.
end-user information	For example, a bottle manufacturer should watch sales of beer and soft drinks. A fabric manufacturer should watch apparel sales.
consumer sales forecast	A company should also monitor its own clients. A manager should break out sales reports by product groups, regions, and customers to trace major surprises in sales.
critical cost	The companies that need pay the closest attention to costs are usually manufacturers, utilities, and contractors with with significant exposure to one or two raw materials with typically volatile prices.

Macroeconomic Warnings

• Macroeconomic warning systems should identify when buyers are speeding up their spending or slowing it down. A “census forecast” provides the best look at the future, and average of all the forecasts is usually the most accurate.

End User Information

• Companies close to the ultimate customer, such as retailers, need to watch proximate influences on consumer spending. The general rule is to watch the end-used of your product, no matter how far removed you are from the end user. Companies can estimate their market share, which is critical to interpreting their own performance.

Consumer sales and forecasts

• A system needs to be in place to report to management both the sale that are currently occurring and expectations of future sales. Drilling down the source of growth in sales or decline can help determine whether a new trend is in place of whether the change is temporary. Many companies should include sales forecasts as well as actual sales data in the early warning system.

Cost

• The companies that need to pay the closest attention to costs are usually manufactures, contractors, or utilities with significant exposure to one or two raw materials that are typically highly volatile. Although cost control is important, there are few costs that can rise sharply in the short- run that would seriously hamper business plans.

Summing Up

• The most successful managers are open to evidence or changing conditions. They must evaluate the market conditions, discuss the evidence with someone else, and preform a monthly review of economic information which builds familiarity with the data.

Economic terms

Explain each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:

• The Economist
• Fun economic videos

Explain the terms in your own words briefly.

Seasonal Adjustment

• The process in which there are normal seasonal fluctuations are removed from the overall data to show changes in busniness from month to month which shows everything except normal seasonal fluctuations.

Economic events

Describe the characteristics of the following events briefly.