Scenario Planning Meets Procurement

In my first job out of graduate school, I had perhaps the coolest job description any management consultant could wish for: to imagine and define potential futures for companies and industries. Obviously, there was a process behind this, but even with the constraints of working inside a defined rules set, I had an exceptionally neat job as a scenario planner. At the time, much of my work was focused on corporate strategy and planning, but I was sufficiently inspired by a number of customer situations to dig deeper on procurement and supply chain, an interest which ultimately led to a career in the market when I left the firm to join FreeMarkets. Still, scenario planning -- and scenario thinking -- has stayed with me to this day, and I remain convinced that scenarios not only have a place in the boardroom but also at the more tactical procurement and supply chain levels (even when it comes down to commodity strategy). A recent article in Procurement Leaders does a good job of explaining some of the basics of how companies can apply scenario approaches to their buy-side planning efforts.

The article (for which I was interviewed), suggests that scenario planning “offers the opportunity to test how supply chains would behave under various conditions” including “how internal pressures, such as those from finance, might affect the role, and to learn which strategies would be prudent in a given set of hitherto unforeseen circumstances.” I gave Procurement Leaders a few reasons why scenario planning is an ideal technique, including the importance of integrating risk management approaches into sourcing strategy. In this regard, scenario planning looks at what “might happen in the future rather than forecasting what should happen given, for example, given 10-15% variability.” Consider how a “traditional planning technique would [never] assume 50% volatility in the price of key commodity inputs over a 12-month period … And certainly no finance and accounting-based financial model would think to include a similar 50% demand variability for our own new customer orders. But these are precisely the types of examples that did occur in many industries following the [economic and] credit crisis."?

Beyond examining and modeling the impacts of volatility that extend beyond the norm, another reason to consider scenario planning is to understand the role of scenarios in helping prepare for truly crisis situations. A companion column in the Procurement Leaders blog discusses this in detail when it suggests how scenarios can help organizations plan for disasters, both natural and man-made. If anyone in the Spend Matters audience is ever interested in discussing the role of scenarios in procurement, please drop me a line; it’s a subject about which I’m passionate. I can help you start to think about how to incorporate scenario approaches in procurement into a range of areas including:

• Overall role and charter (e.g., savings vs. innovation vs. risk management)
• Geographic investments and exits
• Strategic orientation and approach (e.g., split of business vs. supplier consolidation/rationalization)
• Supply risk
• Intersection of procurement with other corporate initiatives
• Cost savings vs. cost avoidance
• Governance/structure

- Jason Busch