IBP/S&OP scenario planning
While the full impact of the coronavirus (COVID-19) remains unknown, the increasing uncertainty and volatility in supply and demand is making forecasting and decision-making challenging. A potential black swan event, COVID-19 highlights the risks and vulnerability of our businesses and supply chains and the need for tools that keep us one step ahead.
These days, it can be hard to reach a consensus on that all-important number: next month’s expected sales. Instead of gearing your company towards an expectation that is highly uncertain, evaluate a few scenarios for how the future might look and gain an understanding of how changes will impact your company.
Scenario planning is a tool that helps create strong and reliable decision proposals to counter and/or exploit upcoming events, such as the COVID-19 situation, by providing a structured approach, based on qualified assumptions rather than historical data, to identify drivers, scenarios and possible outcomes. We’ve created a framework around scenario planning with five steps to help mitigate the uncertainty and applied this to real companies from an IBP/S&OP perspective.
On 17 March, the world’s largest car manufacturer, Volkswagen Group, announced the suspension of production in 15 European plants. A response to a rapid decline in demand, the suspension was also implemented as the car manufacturer was struggling to supply their operations with the necessary parts. This has impacted other industries and companies in the supply chain. The Fastener Company, a clamps and fastener manufacturer, who received over 50% of their revenue from Volkswagen is now in an extremely fragile situation. In turn, a hospital appliance manufacturer further down the supply chain which provides the Fastener Company with the rest of their revenue, is now also in a fragile situation. If Volkswagen no longer purchases parts, it may force the Fastener Company out of business, also resulting in a production loss for the hospital appliance company.
The dependencies and dynamics of supply chains are now increasingly demanding. Products with stable demand yesterday may exhibit fluctuating patterns tomorrow, and your most reliable suppliers might be out of business by the end of the month. Predicting the future has never been more challenging.
The Fastener Company needs to quickly understand the situation. Is it only Volkswagen Group that is closing down? Do other key customers plan to do the same? Can they shift some demand to other industries? These drivers need to be understood before good scenarios can be developed.
With the drivers in place, the Fastener Company can establish three scenarios for the analysis:
a. A complete halt on shipments to the automotive industry, but no impact on other industries. -50% sales in the following months and a slow incline to get back to normal (a V shape).
b. A complete halt on shipments to the automotive industry, but ability to shift some demand to other industries. -50% sales next month followed by a steeper incline to reach -25% after month 3. Normal sales from month 5.
c. A complete halt on shipments to the automotive industry, and other industries are also closing. -75% sales in the following months with no signs of an incline during this period (a L shape).
With the scenarios in place, the Fastener Company can begin to work on their options. One option is to reduce or stop production of a specific product group. Another option is to modify an existing product to repurpose for use in high-demand hospital equipment.
With scenarios and options in place, the Fastener Company can evaluate the cross sections. They quickly realise that some of the options will expose them to a large risk if a different scenario materialises.
With the different outcomes analysed, the Fastener Company has a clear preference: a set of actions that enables them to aim for potential upsides from shifting the demand to other industries, at a relatively low cost. They use the drop in demand to convert a production line to make it more versatile and to produce items used in high-demand hospital equipment. If they are not able to shift the demand, they are still able to produce the components for the automotive industry under the expectation that demand will return if production resumes.
Scenario planning is a tool that can help guide your business through volatile times, helping you face challenging decision-making and supply and demand forecasting head on. A structured five-step approach can aid you in preparing for the future.
Read more about scenario planning in IBP/S&OP here
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