Supply Chains will be changing.

Over the past forty years, global sourcing, outsourcing and lean structures, overseen by IT networks have often improved efficiency and reduced costs, but they have also allowed the creation of extended (and potentially fragile) supply chains. This occurred on the assumption that the world had entered an era of stability and safety. But that scenario is under threat, as trade liberalisation measures have slowed, influenced by perceptions of increasing protectionism.

An OECD report states that between 1986 and 2007, the volume of world trade went from 30 percent to 60 percent of gross world product. This was a period of removing barrier to world trade; but since the financial crisis, growth in world trade has only been similar to growth in gross world product. Even so, the OECD noted that over 70 percent of global trade is in intermediate goods (components to be assembled into finished goods), services and capital goods.

The situation of falling world trade, potential protectionism and extended supply chains illustrates the increasing need for strategic planning within an organisation’s supply chain group; to better inform the corporate strategic plan. In his book ‘The Rise and Fall of Strategic Planning’, Mintzberg (1994) defined the concept of  ’emergent’ corporate strategy. He argued that strategies cannot be analytically planned, but rather they emerge in a process of thinking that involves creativity, intuition and learning.

My blog discussing complex supply networks used the acronym VUCA to describe a similar situation within supply networks. Logisticians must therefore respond to Uncertainty; Complexity, Variability and Constraints; non-linear operations (with many ‘ifs and thens’) and emergent and cumulative outcomes. This requires an understanding of how your supply network functions; step one is to gather base data from the four core elements within the supply network:

• Nodes – each location which holds material items or money. Details of core suppliers and customers at their respective locations
• Variables – factors that can change the physical or financial values at a node
• Links – transport movements of material items between nodes. The ownership, influence and control of critical links
• Flows – transfer of money, data and information between nodes, variables and links. Contractual responsibilities with suppliers and customers

Scenario Planning as a tool

When the base data has been structured (and allowing for periodic updates), Logisticians can then ask ‘what if’ questions of the future – this provides the opportunity to implement Scenario Planning. The concept was developed in the 1970s as a corporate tool, with the objective to develop different views of the future, analyse their possible likelihood of occurring and consequences and therefore be better prepared for future developments. The concept and methodology can also be used within a supply network, because the three elements of core supply chains – Procurement, Operations Planning and Logistics, contain the breadth of an organisation’s business.

Scenario Planning assumes that future developments are largely uncertain – managers need to translate their acceptance of uncertainty into thinking about multiple options. Scenario planning requires exercises to identify and project trends and the possible implications. It is best to look between ten to fifteen years into the future, because it challenges perceptions of group members. Examples of future supply chain situations identified in previous blogs are:

• Location and facilities of owned and leased warehouses and distribution centres to mitigate the effects of global warming and energy conservation: Examples are vulnerability to flooding and the time to become Net Zero Carbon Emissions (to produce internally the renewable energy required by the business)
• Consolidation of container shipping lines. The research firm Gartner considers that at some time in the future, more than 80 percent of sailings could be controlled by a few large shipping or multi-modal transport groups. To ensure full ships, there could be limited sailings to only a few selected ports, with higher freight rates
• Implementation of cost effective technologies that encourages local production of some items; this could result in less warehouse and transport services
• Financial markets re-pricing of risks: could significantly affect asset values and expense levels

Each organisation will have its own set of critical supply chain situations, with more than about five being too much to consider, due to inter-connections. The situations will identify factors that cannot be forecast, planned and controlled. They will also contain sufficient detail (obtained from the supply network base data) to enable a reasonable assessment of the likelihood and consequences of success or failure of selected options. The assessment is done using tree diagrams, risk analysis and discounted cash flow (DCF), to provide comparative pictures of outcomes or scenarios. The results can be incorporated into the supply network and corporate strategies.

To form a decision tree diagram for the subsequent risk analysis, apply a number of options to each situation. The value of Scenario Planning lies in the discussions around options, risks and the likely consequences. Examples of options are:

• Change the inputs and outputs supplied in the base data for the supply network; or from other sources
• Expand, contract or postpone operations
• Commence a pilot or test project to ascertain the viability of an approach
• Phase an implementation to conserve resources
• Terminate a project or direction
• Invest for future growth opportunities
• Combination of options, where an initial selection is modified by another option at a later date

Scenario Planning is undertaken within a workshop setting, with about 12 participants (from supply chains and other functions), formed into three teams. Over (preferably) a two to three day residential workshop, the group and teams consider the situations, identify possible trends, apply options, evaluate the risks and develop scenarios. As the workshops are often facilitated by an external consultant, the format will vary. But at the end the participants will be a lot wiser about the opportunities and threats within the supply network.