Scenario Planning: Supply Chains Need a Plan

Scenario Planning - QAD DynaSys Blog

It’s a universal truth that in supply chains there has to be a plan. A plan of what is going to be sold, a plan of what inventory is needed to meet the demand, a plan of what to make, and a plan of what to buy. The accuracy of those plans might be questionable, but ultimately for a supply chain to function there has to be some form of plan that is driving decision making. Even when they are faced with unprecedented events like we’ve seen with the current COVID-19 pandemic, the equivalent of a punch in the face, Supply chains need to continue to operate in the face of disruption. The ability to adapt to change and manage the issues that present themselves can be facilitated by good planning.  Ultimately Supply chains need a plan, and they need a plan B, and C and D, because when, and not if, disruption happens they can be prepared for the risks and opportunities that they will face.

Over the last few years we’ve seen many large disruptions linked to geo-political events such as Brexit, tariffs on steel & aluminium raw materials and the US-China trade war. But arguably the most recent and most significant disruption ever has come from the current COVID-19 global pandemic. The impact has been felt in every supply chain in the world. Huge increases in demand for basic items such as pasta and toilet roll, through to vital medical supplies of testing equipment, protective clothing and ventilators.

As well as those obvious products where there is a general increase in demand, there have been some product supply chains with more subtle changes. For example alcohol sales switched from entertainment venues to home consumption. Arguably overall demand may have stayed the same, but people were buying through different channels such as supermarkets rather than through bars and clubs. For the manufacturer this means switching production to different packaging which needs different raw materials and distribution through different channels.

Right now we just don’t know when and how this will end and what impact the exit strategy from each national government is going to mean to the demand and supply of the products that we consume. Major disruptions can be a catalyst to implement long term supply chain strategies. Organizations that can react better to disruption have a better chance of staying in business and can sometimes thrive by having a more responsive supply chain than the competition. 

In the current situation, there are companies that have adapted quickly to the ‘new normal’ and have continued to operate in the face of disruption. Despite having never experienced anything like this before they will be able to simulate the effects on their supply chain. They will be able to run scenarios for a range of possible outcomes and have seen where they potentially need to adjust their supply chain – to add or remove capacity, where they need to adjust the inventory or distribution strategy and have evaluated the points of risk within the network.

By understanding the potential impacts, companies can mitigate the risk by building contingency plans and alternatives. They can make an informed decision about investing in the supply chain to enable it to absorb the demand and supply shocks that inevitably happen during a major disruption. When there is disruption and change, supply chains behave differently and it’s important to assess the potential impact and trade offs – service, inventory, cost – across the end to end supply chain.

From the demand side there will be opportunities and / or risks. So you sales forecasts need to capture those different scenarios and the underlying assumptions. The assumptions are key because planning is not a one-off event, and it’s crucial to revisit those assumptions to test if they are still relevant as conditions change and new information is acquired that can impact on the expected level of demand. And it’s worth remembering that forecasting is a team sport. It works best with collaboration from the stakeholders inside and outside the organisation.  Customer and distributors and external market data can all play a role in helping to shape and validate the different demand scenarios that should be evaluated.

In order to meet the change in demand, there will be an impact on the inventory strategy. That could be as simple as being linked to a number a days cover so in a scenario of increased demand, the knock on effect is to increase your overall quantity of inventory. Or it might be more significant where the positioning of inventory is modelled to reflect a change in strategy.  For example moving stock closer to local markets to reduce lead time to the end consumer and gain advantage over the competition. Or the opposite and centralising inventory for scare products that need to be deployed to strategic customers. You need to model these different inventory strategies because they can have an impact on service level and therefore revenue, as well as working capital and potentially capital expenditure if new warehouse capacity is required.

For manufacturers the question is what is the impact on the factory? If it’s an opportunity of increased demand then what additional resources are needed to meet it? Or can it be met by anticipating the increase in demand and building inventory when there is available capacity.    Conversely if there is a risk to demand then what is the impact on capacity utilization and efficiency, or potentially creating waste from batch sizes that are no longer aligned to demand.  The scenario may also be linked to issues on supply. If there is a potential shutdown and reduction in capacity, what is the impact on service level and being able to fulfil demand. Again could it be mitigated by building inventory ahead of the shutdown, or switching to an alternative, albeit more expensive, source whilst production is offline.

Whatever the factory plans to produce will rely on certain critical materials that are potential bottlenecks if they aren’t available. These material requirements and constraints must also be considered in any scenario to ensure that production plans can be executed efficiently when it comes to shop floor. Those scenarios of opportunities and risks must be considered from an end to end planning perspective to be meaningful and to ensure whatever scenario is ultimately chosen has considered all elements of the supply chain including both manufacturing and purchasing.

The financial impact of any scenario should also be considered because ultimately decisions taken in supply chain planning will impact on key financial measures such as revenue, profit, inventory investment, production costs and potential capital expenditure.  By assessing the financial impacts in parallel to the traditional supply chain measures of service, inventory & capacity, you are ensuring that everybody understands the overall impact of the scenario on the business. 

The enabler to be able to plan scenarios and do this type of end to end scenario planning is your supply chain planning system. It’s what is going to allow you to assess opportunities & risks by modelling the different possibilities and understanding the impacts on your supply chain. The question to ask yourself is “is my planning system capable of running multiple scenarios that can tell me the impact on my end to end supply chain.?”

Is it going to allow you to be flexible, agile and responsive and to navigate the disruption; or is it going to mean you are anchored to the same way of doing business and just firefighting your way out of the disruption.

So just to wrap up on a few key points

Disruption is not new

We are in the middle of a huge disruption, but disruptions of a smaller scale are happening more and more frequently. So they are not going away any time soon.

Resilience is a differentiator

Being able to manage disruption and continue to operate is a huge advantage.  These major disruptions can be the catalyst that you need to think about your long term supply chain strategy

Scenario planning provides resilience

By running these scenario plans across your end to end supply chain, from demand to supply, you can see where the potential impacts are and how you can react to them.

Integral to your risk management strategy

This is a key part of your overall risk management strategy for the business. You can mitigate risk by looking at the potential impacts on your supply chain and make informed decisions about where you need to invest in your manufacturing and distribution network

Gary Shaw
Gary joined QAD DynaSys in 2014 as a Business Consultant. He is passionate about enabling organisations to unlock the potential of supply chain planning solutions to support their Integrated Business Planning processes. Prior to joining QAD DynaSys he spent 7 years in system implementation and 10 years in operational planning for various UK manufacturers and retailers. In his spare time Gary spends his weekends in wet and muddy fields watching his two sons play football and the occasional round of golf. He has promised his colleagues that one day he will learn French.