Logistics and supply chain management are major users of planning. The flow of goods is optimally controlled with help of an advanced forecast. But what to do if the future is inherently unpredictable, as it is now during the corona crisis? The chain will then have to be managed in a completely different way; scenario analysis is an indispensable tool.
Governments are facing an incredibly difficult task in the corona crisis; far-reaching decisions must to be taken, the effects of which are uncertain and will only become clear in the somewhat longer term. It is therefore compared to 'steering in the fog', or, as Prime Minister Rutte states: "With 50 percent of the knowledge, we have to take 100 percent of the decisions". In the very tightly organised Netherlands, where under the motto 'bad luck must go away' there are a lot of laws, regulations and procedures to keep things tight, it feels extremely uncomfortable.
Something similar applies to the (international) logistics and supply chain; here too, the COVID-19 virus causes enormous uncertainty. Entire regions live in a 'lockdown' for a shorter or longer period of time, which severely disrupts both demand and supplies. Suddenly toilet paper is unavailable and flowers and plants are hardly ever sold anymore. Typical questions then are: 'How long does the hoarding last and what is the effect of the stockouts?' And 'How big is the raw material shortage and what alternatives are there?
Asking questions is easy, they are more difficult to answer. Especially in the short term. The historical data simply do not provide sufficient insight into this very specific period. In general, the bottom has fallen under the widely used operating system 'command & control'. This problem has been pointed out many times in theory. After all, the business environment is slowly but surely becoming increasingly volatile, uncertain and complex. This necessitates a different control paradigm, namely 'sense & respond'. That's not news in itself. But many organizations thought it was still too early to actually implement the fundamental changes that go with it. But many organizations thought it was still too early to actually implement the fundamental changes that go with it. This crisis could perhaps force a breakthrough in this.
In a highly uncertain environment, it is important that an organization is agile, so it can respond quickly and flexibly to rapidly changing circumstances, in terms of volume, use of materials, markets, product portfolio, suppliers, etc. Collaboration and information sharing between chain partners is essential in this respect. But even an agile organization cannot do without good preparation and thinking about what the future may bring in the medium term. The term 'predict & prepare' is often used for this. Scenario analyses are a simple but powerful tool for this purpose.
In essence, scenario analysis consists of four steps. The first step is to map out exactly what the integrated supply and demand chain looks like; who are the important players and what are the most important parameters on which these organizations are driven? The second step is to make a risk analysis (where both threats and opportunities must be considered). By asking 'what-if questions', all kinds of situations (the scenarios) can be discussed in a structured way, thought through (how will everyone react?) or even calculated. Because a lot of things can happen, it is important to highlight those scenarios in where 'probability x impact' is relatively high.
A third step is to determine how to deal with the most important scenarios. This is especially important if actions need to be taken well before the scenario occurs; so to 'use the time if you have the time'. This is not just about your own actions, but certainly also about agreements with the chain partners. The fourth step is to first determine and then monitor the so-called 'early indicators'. Some situations arise like thunder in clear sky, but most of them have been appearing subcutaneously for some time. The trick is to pick up such indications as early as possible so that the actions associated with a scenario can be accelerated.
All in all, scenario analysis is a relatively easy instrument to use. And there is also a lot of experience with it, for example with governments that need to prepare for all kinds of possible incidents and have developed scenarios for this. However, the challenge does not lie in the scenario analysis tools as such, but in the willingness of users to act proactively on a regular basis while there is no urgency. And also in their willingness to admit that they can never really be 'in control'. It is not easy for many managers to accept that decisions, given the scenario analysis, are 'good' in themselves, turn out to be wrong. In other words: scenario analysis does not remove uncertainty, but often makes it (much) more manageable.