There was a chance this could happen, things are slower than expected, or we didn’t see that coming. All pseudo-valid excuses for missing your budget or latest forecast revision. Or not. What it means to me is that your S&OP considered a worst-case scenario to understand the potential implications of the downside risks, so the prevailing narrative reported to the executive team was overly optimistic.
But, before we get beat up again, let’s take a step back and revisit the bigger picture…
A game of Christmas Chicken…
Earlier this week, both the US and China dropped their reciprocal tariffs, signaling a pause in the effective embargo on Chinese goods entering the US. However, a 30% reciprocal tariff and 20% Fentanyl Tariff remains on certain imports from China, and consumers will continue to see price increases through at least the end of the year on all imported goods, so stakes are still high for the two largest economies to strike a better deal.
While these changes are not going to bring iPhone production back to America, they do carry significant implications for business operating costs, working capital, and investment decisions. All of this is unfolding against a backdrop of economic turbulence. The Chief Investment Officer of JP Morgan even floated the dreaded term “stagflation,” a situation where inflation rises while GDP stagnates.
I know this sounds bleak, but when I worked in restructuring, preparing for the worst wasn’t just good practice. It was necessary. Overly optimistic leadership often left a trail of dead bodies that we got paid to clean up. Shareholders only have so much tolerance for missing your latest forecast revision…
So, what do we do?
While many teams are heads-down recalculating forecasts yet again, here are a few actions that leadership should be considering:
Forecast a pessimistic scenario
As any demand planner will tell you, final forecasts rarely come in less rosy than the first draft. Budget pressures and performance targets often drive overly optimistic assumptions. But this is the time to plan realistically. Even if it’s not the only scenario you share, a conservative version must be included.
Support your case by pointing to key factors that will affect inventory and availability:
- Port congestion will increase as trade resumes
- Higher holding and shipping costs are inevitable, regardless of tariff specifics
- Consumer sentiment has dropped to levels not seen since the early days of the pandemic
- Household discretionary spending is declining, along with most other economic indicators
- Inflation is inconsistent across categories but is likely to trend upward over time
If you take an honest look around, it’s clear that expectations set last fall are no longer grounded in current market conditions.
So build a conservative forecast. And if you’re tired of massaging spreadsheets or trying to outguess your statistical tools, it might be time to make the leap to AI forecasting. With modern AI, you can generate forecasts in a fraction of the time and with better accuracy. These tools can also consider external factors automatically. In 90 days, you could have a system in place that delivers better planning and sharper insights. Ask me for a recommendation if you’re curious. I haven’t had a client disappointed yet.
Optimize inventory against your risk profile
The next major decision is aligning your inventory strategy with the forecast. There are two sides to this: demand and inventory.
Demand: Will each household buy two dolls or three this Christmas?
Inventory: How many do we import now versus waiting for potential cost relief?
Carrying expensive inventory will hurt in January. Missing sales due to out-of-stocks will hurt even more in December. Either way, supply chain planners rarely win, but in one of those cases, you might get to share the blame with sales and marketing…
You can bring this decision into your S&OP cycle and weigh it against your current working capital tolerance. While the example above comes from retail, manufacturing teams face even more complexity. Multi-level BOMs and raw, WIP, and finished goods inventories all affect the outcome. Poor visibility into these layers is often the root cause of slow-moving or obsolete stock.
If you haven’t already revisited your portfolio as suggested in my last post, now is the time. A detailed inventory analysis is critical. The same AI tools used for forecasting can also help model and optimize inventory, giving you a better shot at offering sound recommendations. The risks may not disappear, but your ability to manage them will improve.