Seasonality refers to recurring fluctuations that happen at regular and predictable periods every calendar year. Business cycles on the other hand can be anything but regular. Business cycles are the natural rise and fall of a company’s economic growth over time, characterised by the four stages of expansion, peak, contraction and trough.
Expansion marks the period from trough to peak where high growth, pricing increases and low unemployment represent the momentum of economic activity. The peak or upper turning point is the point of a business cycle where expansion slows and contracts. Inflation is characteristically a sign that a business cycle has reached its peak.
Contraction, the period from peak to trough, is when economic activity stagnates or slows. Often coinciding with falling prices and high unemployment, eventually this will lead to a trough, the lowest point of a business cycle. This trough also represents the turning point, which is also referred to as recovery, when economic activity gradually rebounds and starts to expand.
Seasons, holidays and annual events can have an impact on a company’s business cycle, so managers need to accurately identify the seasonal influences that affect their business.
Highs and lows
Seasonal fluctuations are generally short term whereas cyclical phases can last much longer. It is credible to expect that seasonal shocks could impact business cycles. However, the resultant impacts would differ relative to whether they occurred demand-side or supply-side.
Demand-side spikes are those seasonal times where a dramatic increase in demand occurs. This could be the predictable increase in the sale of retail inventory stock, such as the leadup to Christmas or the end of financial year. On the other hand, supply-side fluctuations can be caused by the effects of weather conditions that can either trigger an increase in yields, or the annihilation of crops.
Fluctuations of the business cycle tend to have a greater impact on heavy-duty manufactured goods and a lesser effect on service industries. Equally industrial and wholesale prices are largely affected more than those of retail prices.
Two significant challenges for organisations operating in predominantly seasonal business, or those with frequent peaks and troughs, are how to boost staffing levels in times of high demand and ways to maintain profitability in the off-season or periods when demand slows.
Recruiting the right employees with the necessary skills can be challenging, particularly when the business cycle is experiencing high employment. Organisations need to find ways to build loyalty and encourage good workers to return in peak seasons.
Maintaining cashflow can be extremely difficult in slow periods and can negatively impact profitability. Business owners can implement strategies to help generate sales in these times through promotions, product extensions or new sales channels.
Aware and prepared
Most businesses should expect to experience seasonal fluctuations in product demand. The ability to accurately identify seasonal influences and the purchasing habits of your customers will help many in managing seasonal variations.
Exponential soothing is inherent to seasonal adjustments for demand forecasting. It is pertinent that businesses base their forecasts on general demand first, before factoring in seasonal influences. Equally important when forecast planning, is to understand at what stage of the business cycle you are currently in.
Over forecasting can leave you holding too much inventory stock. This increases holding costs and could leave you with large quantities of unsaleable or obsolete stock should demand unexpectedly plummet. Overcome overstocking by adopting lean practices and limiting the amount of inventory stock your business holds.
Downturns in seasonality and cyclical contraction both offer an opportunity for organisations to undertake strategic planning activities, maintenance projects and market research.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.