Scenario Planning

“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security” - John Allen Paulos
 

A critical success factor to survival in both nature and business is the ability to learn and implement quickly – to adapt and evolve.

By reducing the time it takes for your business to know what’s happening, learn what is needed for success and implementation, you can outpace your competitors and capture new opportunities.

Overview

Scenario Planning is a structured “what if” analysis of the future internal and external operating environment. It enables proactive strategic, operational, and tactical adjustment to address potential issues and opportunities. Trade-offs between opportunities & risks are then analysed against given constraints.

Effective Scenario Planning supports rapid, optimal decision making and enables a business to act swiftly and with confidence. The benefits of Scenario Planning include:

  • Forward Visibility
  • Informed Trade-off Decisions
  • Decision Optimisation

Essentially, Scenario Planning enables organisations to turn unknowns into knowns, factually assess options and act with confidence

Challenges

A recent survey conducted by GRA and the AFGC into the Australia’s food, drink and grocery manufacturing industry found that whilst 89% of survey respondents identified as having a formal S&OP process in place, 60% of respondents identified their capability in Scenario Planning as non-existent or insufficient.

This identified that:

  • Industry capability in scenario planning has not evolved out of S&OP yet
  • Organisations are not fully prepared to manage shocks or changes to the business environment

Building an effective Scenario Planning process does not come without its challenges. These often include establishing a disciplined and trusting culture – and development of an integrated planning and analysis framework which enables the ability to act with confidence.

Sometimes in the face of complexity, organisations oversimplify and make costly assumptions. These simplification approaches can lead to loss in value of business results, as well as erode confidence in the organisation’s planning capability. These simplification techniques and settings can occur behind the scenes, deep within ERPs and other planning systems.

Examples of some common simplification techniques are:

  • Systems which allocate “Top Down” via averaging, can lead to cases where two different items, one with sales trending down and another with sales trending up, get allocated the same forecast!
  • Approaches like “Days Cover” do not consider costs, service level targets or variability. They are inflexible and do not achieve consistent, targeted service levels.
  • Replenishment methodologies which do not provide forward visibility, such as ROP/ROQ and Min/Maxes do not yield effective time phased replenishment plans.

Disintegrated planning systems and poorly set up cross-functional frameworks often lead to a lack of ability to make a change upstream and assess the downstream impact. Scenarios are often created in isolated spreadsheets, built independently with disintegrated information which are not able to create an accepted “single version of the truth”.

Opportunities

As a result of the ever changing landscape, many businesses have focused on establishing ready access to comprehensive information to help understand the impact events may have on suppliers, businesses’ ability to distribute and customer demand profiles. This has driven the emergence of ‘control tower’ operational models in many organisations. These structures enable senior leadership to consolidate relevant information from both internal operations and the external environment in order to develop effective action plans.

One model that may assist in the decision-making process is OODA. Developed by John Boyd, a US Airforce Colonel, OODA provides a helpful framework to enable effective decisions to be made faster in evolving environments by organising the scenario planning process into four key segments – Observe, Orient, Decide and Act

The OODA model is an iterative process with observations made to assess the efficacy of preceding actions and environmental changes, whilst also guiding future business plans. The following provides more detail on each of the OODA scenario planning horizons.

 

Scenario Planning during Covid


 

 

 

 

 

 

 

 

Scenario Planning during Covid in Australia

 

 

 

 
 
 
 

 

 

Act - Evaluate and implement solutions. "What is our immediate concern?"

The Act step should address immediate concerns relevant for the next four weeks.

For example:

  • Identify alternative sources if supplies are affected and accelerate exploration of additional options
  • Determine possible geographies and supplier shortlists in case alternate supply is required
  • Identify ways to expedite qualification process and/or insource for components where supply is threatened
  • Contact authorities in areas where customs clearance could become a challenge
  • Determine what portion of supply can be swung to another site if shutdown persists based on sourcing strategy (single, dual, multi)
  • Estimate available logistics capacity; pre-book air freight1 / rail capacity as required by current exposure
Decide - Develop solutions to solve potential problems - "What can be achieved in next 3 months"

The Decide step should focus on issues relevant over the next 4-12 week time horizon.

For example:

  • Evaluate alternative sourcing options for all the materials impacted – availability of suppliers, additional cost due to logistics, tariffs, estimate of price increase of the components
  • Enhance the demand verification process to correct inflated demand to mitigate the bullwhip effect
  • Provide continuous support for mid-small size tier 2-3 suppliers in financial troubles
  • Assess regional risks for current and backup suppliers
Orient - Gather information to support theories. "Challenge assumptions about operating models"

The Orient Step takes the focus to issues in the 12-24 week time horizon, which may include redefining the operating model through technology and restructuring the supply base to improve business continuity planning resilience. Depending on the current operational format of your business, this may also serve as an opportunity to strategically reflect on the ongoing suitability of lean, just-in-time operations given the nature of current uncertainty.

These activities could include the:

  • Redefinition of operating model through technology - "eg How can we adapt and move to more sophisticated replenishment methods… and away from traditional Min/Max and Re-order Point methods?"
  • Restructuring of supply base to improve BCP resilience (e.g. dual sourcing, localisation, faster onboarding) "eg Can we afford to run as lean in future?"
  • Development of comprehensive category strategies with a focus on risk management and business continuity. "eg How well do you understand the tiers in our Supply Chain? - Our suppliers, and their suppliers, suppliers…?"
Observe - Survey situation and form theories. "What is likely to happen over the next 6+ months"

The Observe step will ideally examine issues on the extended 24+ week horizon to enable early scenario planning. We recommend organisations investigate what future events are likely to occur at the local or global level and how these may affect their respective businesses in order to prepare mitigatory plans and the capability to adapt to the new environment.

These activities could include the:

  • Investigation of possible future events at an organisation, industry, global and international level.
  • Exploration of how these events would impact the supply chain (everything from a supplier going into liquidation to a global pandemic).
  • Identification of impacts, mitigations as well as opportunities to pivot and adapt.

When developing scenario plans, it is essential that the plans have clear trigger points and owners to be able to execute with clarity. Establish and communicate transparent trigger points where specific actions are to be taken when certain conditions exists.

The OODA model in some ways may be similar to mature integrated business planning processes, where broad information is gathered in order to enable effective decision making.

The key ingredients to successful Scenario Planning and S&OP are a strong foundation of effective culture and information which enable “one version of the truth”. Results from Scenario Planning are often lacking as many organisations have not yet created this single truth in which trade-off analysis results can be acted on with confidence.

Clear processes, roles and responsibilities are fundamental for success. Processes should be understood and lived across the organisation with roles and responsibilities well defined. Disciplined business processes and carefully considered KPIs help to drive an organisation in the right direction and break down silos which can otherwise occur. Silos and KPI misalignment can be large hurdles in assessing and acting on Scenario Plans.

Reliable Information is an essential element to effective scenario planning. This could involve AI, Advanced Planning Systems, Business Intelligence systems, or it could just be a relatively simple Excel model. Simple is OK for some Scenario Planning tasks. The key is to have reliable and integrated data where it matters. At the end of the day, users must be able to quickly and reliably assess outcomes which deliver results in which there is organisational wide confidence.

Some of the essentials in securing reliable information include:

  • Data integrated across all business functions including financials.
  • Data granularity applicable to the business (such as product-by-location or by customer).
  • Both data and systems management having clear owners and policies.
  • Systems and settings configured specifically for the business and fully understood.
  • Organisation wide confidence in data accuracy.
  • Easy to use systems which enable users to assess outcomes quickly and reliably.

Information must be able to be transparently transformed and read across all sectors of the organisation for analysis results to be reliable and trusted. Systems do not need to be ‘perfect’. Think roughly right versus precisely wrong.

Approach

GRA has extensive experience in developing an organisation scenario planning capability. We look at both the governing structures around the planning process such as the organisational structure, S&OP frameworks, KPIs and policies, as well as the detailed capabilities within the planning processes.

The review is conducted from an end-to-end perspective encompassing:

  • A comprehensive, high-level review of the planning capability (that is the People, Processes, Systems and Data) will be undertaken to identify bottlenecks and pinch-points.
  • A review of the daily, weekly, and monthly S&OP planning cycles as well as the seasonal planning process and how all of these processes are integrated and aligned.
  • The review includes decision rights, policy, KPIs and roles and responsibilities.
  • A review of the information flows, data, and systems that support the S&OP and planning processes
  • Identification of opportunities for improvement by comparing current activities to industry best practice.

We tailor the scenario planning process, system utilisation and data approach to fit every organisation's industry, business requirements and capability. We will work with you to determine the best approach for your organisation to drive results.

Benefits

Trade-off decisions, such as “is it worthwhile targeting a 2% service level increase on A class items?” and “what is the required investment?” can be determined with confidence with mature Scenario Planning.

The organisation develops the capability to measure the impact of scenarios to a high level of confidence, enabling informed decision making. Often these scenarios can deliver both revenue and cost improvements.

The following benefits can be achieved through effective scenario planning:

  • Superior scenario management and decision making typically yields revenue increases of up to 10%.
  • Inventory management Scenario Planning will often reduce holding requirements by 10% to 40%, freeing up cash.
  • 5-15% supply chain operating cost reductions are not uncommon from optimising both fixed and variable costs.
  • In GRA’s experience, Scenario Planning projects yield investment ROI of minimum 3:1, with typical ranges in the order of 10:1 plus.
Summary

While Scenario Planning may be considered an emerging capability today, with only leading ‘best in class’ organisations at the forefront, we expect to see it become more and more common and a necessity of survival in the not too distant future.

Organisations embarking down the Scenario Planning path should do so with full consideration for the commitment required to make it effective. Organisational transformation may be required. The key is to establish the right culture and reliable integrated information which enables one version on the truth.

As we reflect on our learnings from the COVID-19 period to date, and the shock felt by our global supply chains, we anticipate the likely outcomes on organisations will be an increased focus on strengthening scenario planning capabilities, as well as efforts to embed greater resilience.

These initiatives will be driven by government policy responses, in order to de-risk Australia’s sovereign capability, as well as playing a more significant role in investor valuations. In addition, corporate governance structures at a board level are likely to expect greater adaptability and contingency planning from their operational teams. As a result, we recommend businesses take tangible steps today to implement some of the recommendations we have outlined in this paper. Globally, the way forward may remain uncertain, but nonetheless, businesses can take tangible steps today to effectively navigate this unprecedented period and position themselves well for the post COVID-19 world.

– BACK TO CONSULTING

Testimonials

GRA’s consultants are clever, system-savvy, ex-Planning Managers from industry – who have hands-on experience in the planning requirements of FMCG. Their engaging, logical, and disarming approach meant that our planning team were happy to cooperate with GRA in full, and also happy to hear GRA’s list of suggested improvements.

– Danny Mellon, GM Planning, Logistics & Procurement, Simplot

Typical results

  • 20-40% inventory investment reduction
  • increased service levels ranging up to 99.9%
  • 10%-15% reduction in supply chain operating costs
  • 5%-20% spend management savings
  • the ability to fund business initiatives from operating cash flow (OCF) improvements
  • improved return on capital employed (ROCE)
  • a minimum 3:1 ROI (10:1 to 30:1 typical)