A fresh approach to logistics forecasting in 2021

Ninety-one percent of surveyed executives acknowledge that forecasting in 2021 needs to look different. This report from McKinsey & Co. outlines one potential approach.
By Tom Bartman, Kevin Dolan, Rohit Panikkar, and Mark Williams

The pandemic has disrupted the global economy and supply chains. Global GDP is expected to shrink 5.2 percent in 2020.  Different logistics subsectors have recovered from previous crises within 12 months (Exhibit 1), but the shape and timing of this recovery, and which freight type and lane will recover and when, remain uncertain. In our Global Manufacturing & Supply Chain Pulse Survey this year, a third of companies reported facing material and other supply-chain shortages. Given the threat of disruption, 60 percent of our respondents in a recent budgeting and planning survey are building multiple (three or more) forecast scenarios for next year and 91 percent agree that their company’s monthly reviews need to look different (Exhibit 2).

Exhibit 1

Exhibit 2

Given this uncertainty, forecasting errors are bound to occur, particularly with conventional models that are built only upon top-level macroeconomic indicators or based on prior-year performance. This year has shown us that logistics companies no longer have a reliable baseline for building their models. Indeed, model errors in forecasting are rising, and key business metrics (such as operating profit and credit ratings) are affected by unforeseen changes in underlying drivers such as foreign exchange rates, available cargo capacity, and commodity prices. A solution for 2021 could be creating real-time dashboards based on modeling of these underlying business drivers over multiple scenarios.

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