“Shit Happens” Deal with It! - 1

Almost everyone desires security, the natural reaction is to forecast and plan. Still, even with the best laid plans “shit will still happen”! We live in a chaotic World and might as well get used to it. The question is how to deal with uncertainty – is it better forecasts, budgets and plans, or is it better strategies, tactics, procedures and algorithms to deal with “shit” when it does happen.

I choose better strategies and tactics to deal with the consequences of “shit”. I do not have a crystal ball so I know that I cannot forecast with any accuracy – so why waste my time fine tuning forecasts and plans?

The Past is what is wrong with Forecasts

We simply have not enough of a clue about the future – we have no knowledge of what is really going to happen. Every forecast I have ever seen is an assumption about the future – most often this assumption is some sort of extrapolation (very often linear) made from the past. Extrapolation in some form or another occurs whether or not a person or a computer makes the forecast – it is the only way most of us know how to visualize the future. After all we have to base our forecast on some sort of information and assumptions.

In my career I have seen interesting situations that demonstrate the unreliability of our forecasting and planning capabilities (as long as the future looks like the past forecasts will be Ok – when something jolts the economy (even just a little bit) accuracy goes out the window.

• I was responsible for a type of Nylon for hosiery that had a superb texture and feel to it, but it was significantly more expensive than other, conventional, nylons. This, rather superb, product was not selling well around the World and my sales area was no exception. Based on forecasts we would never make any money with it. Management decided to get out of the business – starting with my market; told me to get out of the market – stop selling the product.As sales manager for the region the best way I knew to cut demand was to increase price dramatically. So I doubled it. What happened next was a surprise … demand increased! Doubling the price did not work, so I did it again. Demand continued to increase and at this new price the product became very profitable. What I had done – quite accidentally – was to create a luxury product.Our forecast based on historical demand and therefore our business plan indicated the best we could was to get out of the market. As it turned out, we did not understand our (customers’) market and by total accident created a success. The lesson I learned was to be ready for surprises, and when they happen take advantage of them.
• Later on I was manager of another business and had the good fortune to have two excellent years of growth in sales and profit. It was budget time near the end of the second year and my sales forecast was due. From what my gut was telling me (I could not prove it and extrapolation of the trend showed continued growth) sales in the following year would at best match what we had just achieved. Well the computer’s projection out of the past indicated my business would grow again. In the end my gut lost to the computer’s forecast – management ‘talked me into’ a growth forecast (despite the knowledge that our industry was operating at close to capacity). Reality showed that my gut (which I could not explain well) was the much more accurate forecast. (NB. In this case my gut was correct, but could just as well been way off with the computer’s gut delivering the better, more appropriate, forecast.We don’t know which forecast will be correct – what we need are tools and processes to react to reality correctly.
• A long time ago double knit polyester fabrics were all the rage – they were cheap and did the job. Every year we made new 5-year forecasts always showing that the dramatic increases in sales would not continue – demand would be flat the following year. Well, it was not – the same fantastic growth went on for more than 5-years. After a number of years of forecasting too low, we learned – this market was growing at a fantastic rate and we had better forecast and plan capacity accordingly. So we extrapolated from history – which by that time looked like almost vertical exponential growth … so you can imagine what our latest 5-year forecast looked like.That was the year growth went from almost exponential to flat and then decline! Clearly using history was a big mistake!

The lesson from this and many other such stories is not that we should stop making plans. We must, however, recognize the fallibility of our plans and therefore the need to build processes and tools that help us respond correctly to surprises in either direction.

The story that follows should speak to many of us. It takes place in January 2009 soon after the recession started.

 

 

 

 

 

 

 

 

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