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Welcome to a world that’s driven by volatility and disruptions. Managing uncertainties is of course nothing new — it’s always been part of strategic operations and a raison d’être for planning and forecasting processes. But companies are now more visibly confronted with disruptions and risks that go beyond the margins of planning flexibility and accuracy. So, how can they detect volatility sooner and anticipate faster? How should they foster resilience and ensure uncertainty works in their favor? They will have to modernize their approach.
A new approach to uncertainty: 4 drivers of success
In the past 10 years, supply chain planning and optimization were all about lead times, inventories, and service levels. Companies balanced supply and demand and used year-over-year capacity, economics, and customer service as the key metrics for success. Integrated approaches, better tools, and data analytics improved planning, forecasting, and alignment between process steps in the value chain.
But a range of recent events turned things upside down. Examples include lockdowns, staff shortages, rampant inflation, and excessive growth. Businesses experience disruptions and face risks that go beyond the margins of planning flexibility and forecast accuracy, both in terms of impact and occurrence.
One might argue these destabilizing factors are exceptions to the rule and will soon disappear. Yet, even in the pre-pandemic era, businesses with complex global networks, intertwined supply chains, and interconnected markets faced increasing uncertainties.
If you pull a thread on one side of the globe, you might initiate a worldwide chain reaction with unforeseen consequences. Even the softest pull can send well-crafted schedules and forecasts up in flames.
In the past few years, economic prosperity allowed companies to stay in their comfort zones: they could lean back and rely on conventional modeling and analytics. They’ll need to modernize their approach to uncertainty. In my view, it’s necessary to upgrade strategic processes so as to gain advantage. We can distinguish four drivers of success (see figure 1), which I’ll discuss below
1. Detect signs early on
Clearly define the potential risks for each of your business components and figure out how to detect them early on. If you adopt a more expansive view of potential risks and uncertainties, you’ll develop your ability to identify them.
It’s crucial to gather a lot more information — on macro-topics such as geopolitics and the environment and business-specific topics like technology, supplier certainty, and the labor market (for staffing purposes). The number of variables tracked currently tends to be less than 10, but may increase to 50 or 100. Advanced modeling and interpretation tools help build early warning systems for different time horizons.
Rather than trying to confirm what you expect, be on the lookout for surprises and be curious about outliers (as well as what they might foreshadow).
2. Be prepared
Implement processes for developing, evaluating, and prioritizing strategic options that go beyond short-term problem solving and deal with several plausible future scenarios. The latter help mitigate risks and define (unused) strategic opportunities.
The goal is to understand the various eventualities you might face and identify ways in which you could respond to them. Be open to outside-of-the-box ideas on new business models (including partnerships, reshoring, nearshoring, or insourcing), alternative sources, new product offerings that help meet customer needs, and advanced digital services. Be sure to explore the conditions for success in each case, and stress test the portfolio of strategic moves against extremes (for example, through simulations). You don’t want to eliminate options here, but it’s wise to understand the impact and complexity. That way, you’ll be fully prepared if you detect signs that indicate you should take immediate action.
3. Act decisively
Uncertainties will always remain, so make sure you rely on two things: your ability to detect signs and your well-balanced set of strategic options to quickly take specific action should these signs require it. Hedge your bets and kick off no-regret actions fast. In the meantime, you can initiate other options with a small investment and gradually expand.
Prepare strategic options by creating detailed action plans, defining clear roles and responsibilities, and mapping the fastest path to launch. That way, you can shorten implementation lead times and ensure new strategies are actionable.
4. Build resistance and resilience
Disruptions are not a one-off event. Managing uncertainties also requires an ability to bounce back: have a close look at what happened and how your organization dealt with it, and draw your lessons from it.
Mitigation plans help you regain operational stability fast without throwing your organization into chaos. Lessons learned from previous disruptions can be used to enrich scenarios and enhance employees’ preparedness for acting swiftly and embracing bold moves.
If you think ahead, your organization will become sufficiently agile to take action should an event occur. You’ll avoid confusion and reduce the risk of errors.
Improve rather than reinvent the wheel
Strategic planning is a continuous endeavor. You don’t have to reinvent your processes to deal with uncertainties and gain an advantage. All you need to do is improve them so you’ll get better at detecting signs, defining bold strategic options, acting decisively, building resilience, and learning from previous events.