This article is the first part of a two-parts article series dedicated to Scenario Planning.
There are events we take for granted when we go about our personal life. We expect that the car will start each morning. We expect that our credit card will work at the store. We expect that we will not become ill.
Experience shows us, however, that some everyday situations may bring about unforeseen outcomes. We acknowledge this by employing mitigation strategies like insurance, spare keys, and calling on friends. But what happens when the magnitude, frequency, and volume of unforeseen outcomes overwhelms even the most well-calculated mitigation efforts? We are forced to think quickly on our feet; in other words, we are forced to be agile.
Likewise, a manufacturing supply chain design is based on a series of assumptions that underpin an underlying model to synchronize supply and demand within the confines of a myriad of constraints and costs. The majority of these assumptions, in normal times, are, like expecting the car to start, beyond reproach. These include material available and capacity.
What happens when even the most confident assumptions become a potential area of risk? Is a new supply chain model required? Is a more flexible model required? How do planners navigate unprecedented disruption? This is where dynamic scenario planning comes to play.
Dynamic Scenario Planning
Scenario management has been evolving for some years. Historically it was relegated to long term strategic planning to model alternate business landscapes. It is equally applied in best practice Sales & Operations Planning (S&OP) to present alternative tactical plans for an executive signoff.
In 2021, scenario planning has become more dynamic and earned a place in day-to-day supply chain decision making. It’s inclusion has been driven by disruption and digitization. Unprecedented and continuous disruption has forced typical tactical decisions like sourcing and capacity into the operational planning horizon. At the same time, the digitization of everything means planners can access copious volumes of often real-time demand and supply signals. Only some of these signals have the potential to influence current plans.
Dynamic scenario planning is a form of scenario planning which is pervasive in everyday planning both operational and tactical. Dynamic scenario planning is used to chart a business response to a potential disruption or unexpected outcome that triggers an investigation. A dynamic scenario may last one hour, one day or an entire planning cycle.
Where do supply chain scenarios come from?
Supply Chain scenarios originate from several sources, which can be categorized into three types; pre-defined, speculative, or unforeseen.
Predefined scenarios are usually recurring scenarios that exist in each planning cycle and have labels such as “Upside,” or “Conservative”. These scenarios may be as simple as a consumer product manufacturer who simultaneously plans with and without promotional activity. The types of scenarios used within S&OP scenarios are usually predefined to offer executives a choice of tactics to deploy.
Speculative scenarios are events that have not yet occurred or that may never occur. An example would be the possible bankruptcy of a key supplier that is known to be in financial trouble. Scenario planning for speculative events generally focuses on contingency rather than mitigation. In the case of a possible bankrupt supplier, this would focus on increasing raw material inventories and fast-tracking alternative sourcing. An advantage to speculative scenarios is that often there is time available to collect the data, simulate the impact, and properly prepare. The disadvantage is that the likelihood of the occurrence is unknown.
Unforeseen scenarios are events that, as the name suggests, are not planned, but have recently occurred or have a known and imminent date. Examples include natural disasters or unexpected changes to tax or trade legislation. In early 2020, the COVID19 pandemic would have been classified as an unforeseen scenario. Such scenarios are the most difficult to manage due to the lack of lead time, poor access to reliable data, and the changing nature of the event.
Unforeseen scenarios are not the same as operational exceptions like a late supplier shipment. A late supplier shipment has a known and precise impact on the plan. There is no value to reproduce the “what if it was on-time?” scenario. Unforeseen scenarios, on the other hand, have an unspecified impact on the plan and require intelligence gathering and modeling to simulate the appropriate response or responses.
An important component of planning for unforeseen scenarios is early identification, which allows planners to maximize the available bandwidth needed to formulate an accurate and timely response.
Our next blog will focus on the lifecycle of a scenario, stay tuned!