Scottish Borders

The dramatic Scottish terrain.

The mischief of the reluctant rain.

The pines from the valley that stand tall with pride.

There is autumn in life, haven't we lost, haven't we cried.

Stripped the trees stand with the will to survive.

We embark knowing not if we shall arrive.

The merciless wind questions- what brings you here?

Voice of the loved ones brings the needed warmth to the ear.

The assurance comes from the hum & rattle of the beast.

Life is sure the greatest journey and mine started in the east.

-Sampreet

The monster called ‘Forecast’

Niels Henrik David Bohr - a Danish physicist one famously said – “Prediction is very difficult, especially about the future”.  A malapropism as it may seem; it inadvertently forces me to think about one of the most discussed topics in a company – the Forecast.

Forecast is a monster because of the sheer impact it has on almost all the segments of a company.  It is a monster that some companies manage to understand and tame better than others and draw direct results in the company’s bottom-line if not the top-line or both.

An inaccurate forecast can toss capacity plans, production plans, purchase plans, staffing plans, cost-working, working-capital requirements haywire overnight. An inaccurate forecast can lead to lost opportunities or huge losses. However some companies that build-to-order (start production after receiving a customer order, example-  Dell) are impacted less compared to those that build-to-stock (who produce in response to an anticipated forecast, example- Unilever).

It is important to note the following characteristics of forecasts:

1)      Forecasts always include two components: the expected value and the forecast error. The ‘expected value’ is simply put the most plausible estimate of future sales while the ‘forecast error’ is the deviation from the expected value (+ve or –ve) based on various factors such as seasonality, trend, market share movement, economic scenario etc.

2)      Long-term forecasts are usually less accurate than short-term forecasts; that is the long-term forecasts have a larger standard deviation of error related to the mean than short-term forecasts.  In this sense sales forecasts aren’t very different from other things in life where near term predictions are more reliable than long term predictions.

3)      Aggregate forecasts are more accurate than disaggregate forecasts; that is they have a smaller standard deviation of error relative to the mean.  It is easier to forecast the GDP of India than it is to forecast the revenues of a company. Likewise it is easier to forecast the revenue of a company than to forecast the sales of a single product from a portfolio of products that a company may have.

4)      The farther up a function is in the supply chain (or the farther it is from the customer), the greater is the distortion of information it receives. This is also called the Bullwhip effect where the order variation is amplified as the orders mover farther from the customer. As a result the farther up the function (example raw material sourcing) the larger is the forecast error.

There are numerous factors that a manager must take into account while forecasting and more importantly while choosing the forecasting methodology (maybe a topic for future discussions).  Some of these factors are

ü  Past Demand

ü  Past Forecast error

ü  Supply lead times for products

ü  Planned advertising campaigns

ü  Macro-economic environment

ü  Competition

As much as scientists would love to create a perpetual motion machine, they are hypothetical and would violate laws of thermodynamics. However the pursuit of these machines is popular in an effort to achieve the ‘as-near-as-possible’ to the ideal. Similarly there can be no such thing as a ‘Perfect Forecast’, but our pursuit of the same shouldn’t end. As a result we can achieve more accurate forecasts and more desirable bottom-lines.

The new work-force in your Organization: Gen-Y

Do you recognize the fact that a new work-force has entered your organization? – today’s 20-somethings often called Generation Y. Marketing departments in many industries take these demographic distinctions seriously in order to identify their specific needs and to speak to them in their language and connect with them better. But are organizations looking within to see and understand the demographics of their work force and appreciate the differences. After-all employee satisfaction is as important as customer satisfaction. So let us try to understand Gen-Y at the workplace.

Aspirations:

Gen Y is probably the first generation to have the kind of never-seen-before access to the world that it has. Also the world itself has been increasingly dynamic in the last few decades and this generation, thanks to the internet and telecom revolutions has had 'real-time' access to the world which is its prime differentiator from the previous generations. What the earlier generations had to pick up through personal contact, literature & guidance, this generation picks up through podcasts, social networking and the virtual world.

The speed and access to information (knowledge) has brought a tremendous amount of exposure, awareness and variety into the lives of Gen Y. This in my opinion has made us more vivid and individualistic than our previous generations. Hence the aspirations are more eclectic and individual centric than those that are family centric or community centric. The aspirations are beyond borders of any kind - they want to be more mobile, they want to develop skills that draw inspiration from various sources, they demand a wider choice and are specific about what they pick, there is a sense of impatience when it comes to progress and they want to achieve much more and much earlier than their predecessors.

Having been in India it would be incomplete to discuss the point about change in aspirations without factoring in the changes in the environment of this country. A growing India and the innumerable Indian success stories have given a boost to the morale and confidence to the young Indian. Today 20-Somethings are able to fathom their strength and look at the world as an opportunity and have the necessary creativity and the latitude to explore in order to excel. The question is no more 'how good you are?', the question now is "how better you are compared to yesterday'. Today's youth make role models of not those who persevered to succeed but those who shot up to success. It is not the Jack Wech’s or the Tatas that are looked up to anymore for inspiration but the founders of Google and Facebook.

There has also been a paradigm shift in the aspiration of power as I see that this generation now aspires influence and association rather than sheer raw power.

The Work-Place

The work environment has become increasingly important over years and many times takes precedence over many other benefits at the workplace. Global and cross cultural teams are a reality and Gen Y wants to be able to ignite ideas and move people across cultures and geographies. Gen Y also has a different view on time, they do not want to be bound by time or place, they are just as happy checking their blackberry mails on a weekend as long as they enjoy flexible works hours during the week. Many offices today have granted remote access to their employees and the youth prefers the flexibility. The only objective is to do something worth the while with the time they have.

Since place of work is less important today and people are often found job hopping, skill development has gained a lot more importance. The young work force while looking for challenging assignments to keep them stimulated is also looking for personal development which is again in line with the idea of individual centric aspirations. It isn't mere marketing or coincidence that has increased the number of executive MBA programs across the globe. Today's workforce is far more connected with the outside (outside the company) world than ever before and 'keeping-up-with-the-Jonses' has a lot of 'Jonses' to keep up with.

Todays' youth also seeks a collaborative work environment with a healthy disrespect for the authority of age. Latitude to experiment, freedom to decide and avenues to excel are far more important while material benefits are considered a given.

The Manager

People managers are but left with no choice but to be accommodating and appreciative of the Gen Y ways. Many managers understand the importance of this in order to keep their workforce motivated and focused towards the goal they want to achieve for their teams. The biggest example is the IT industry which has the largest workforce from Gen Y and has adapted best to get most out of their employees.

Managers today have to be clever and not just accommodate the ways of Gen Y but have to find ways to leverage the ways to realize the potential of their team. Today many companies while blocking access to popular social networking sites have created their own internal employee networking sites, because they understand that this generation depends on collaboration and communication and that can help in getting work done better and faster.

Many organizations have instant messengers because it is faster, easier and a comfortable mode of communication for Gen Y. Many managers have learned to be more liberal about monitoring the work-times of employees and in return have gained extended hours of support from their employees even during off hours/days creating a win-win situation.

Managers also have to learn to adopt technology as fast as Gen Y and future generations in order to keep pace and reach out to them in their language. Companies today have set up virtual classrooms and innovative training material over podcasts and webinars.

This Generation of the work-force is visibly and starkly different for the earlier generations and an Organization would do well to recognize and appreciate this difference and consciously work towards developing systems, mechanisms & policies to inspire, motivate and make the most of the strengths of this young, vibrant and dynamic generation.

PROJECT RISKS

To begin with let us understand what a project is. Any proposal that will result in the use of scarce resources of a firm is a project. Thus, everything from a new product launch to shifting of the office falls within the definition of a project. Any project being considered must go through the stages of assessment, analysis and approval before it goes into the execution stage. One of the most important implications and considerations of a project proposal is its Cost to the firm.

A firm may have many sources of funds (example: Bank Loans, Promoter Funds, Cash Reserves etc.) with different rates for cost-of –capital. For simplicity sake, let us imagine a single pool of funds available to the firm at a single rate of cost-of –capital. A firm with a cost-of-capital of 10% will have to ensure it earns more than 10% and hence ensure that all the projects undertaken put together help the company in doing so.

The cost-of-capital for a project is directly linked with the degree of risk that the project carries. Projects that are riskier have to be assessed with a higher cost-of-capital than projects that are safer, i.e to assess if the risky project can earn higher returns to payback for the high cost-of-capital (which may be set much higher than 10%).

The risk in a project may come from many sources, such as the industry, government regulations, international considerations or even the project itself. The different sources of risk for a project can be:

1) Project Risk: An individual project may have higher or lower returns than expected, either because the analyst misestimated or because of project specific factors. For example, the returns from a new product launch are lower because of an un-foreseen quality issue with the product.

2) Competitive Risk: This risk emerges from the actions of the competitors that may affect the firm’s returns (favorably or unfavorably). For example, sales of the new product are lower than expected as the competitor dropped the prices of their products.

3) Industry Risk: These are factors that affect the returns of a specific industry and thus all projects considered within the industry will be exposed to this risk. Industry Risk can further be classified into three types of industry risks.

a. Technology Risk: Drastic changes in technologies compared to that while the project was analyzed can have a huge impact on the returns of the project. The sudden change in technology can immediately bring down the market prices of a product or result in a complete shift in customer preferences.

b. Legal Risk: This reflects the affect of changing laws in the operating regulatory environment. This is more prominent in the pharmaceutical industry.

c. Commodity Risk: This reflects the effects of changing prices of commodities and services that are used in a specific industry. For example, the product launch project could earn lower than expected returns due to a sudden surge in raw material prices.

4) International Risk: A project faces this kind of risk if it is international in nature and implementation is in a different country, where the cash flows (or costs) will be in a different currency. The project may also face challenges due to dynamic international relations between nations.

5) Market Risk: This source of risk affects all firms and all projects and emerges out of macroeconomic factors such as interest rates, inflation, economic growth and investor confidence etc.

Hence it is critically important that any project being considered is put through a comprehensive risk assessment exercise. This will help in arriving at a realistic assessment of returns and also in developing a contingency plan for different scenarios.

It is perhaps apt at this point to also mention that, it isn’t that pessimism, skepticism or risk aversion makes one a sound analyst. The point is to be aware of all the risks while making a project decision.

A project may be seen as a sky dive, there are obviously many risks but by knowing them well and preparing for them, we can still make a perfect landing. Higher risks often come with higher returns and hence the trick is in taking well calculated risks.