Addressing uncertainty with scenario planning

Since the coronavirus (COVID-19) emerged, there has been only one certainty: Things are uncertain. Nobody knows how long governments will enforce lockdown regulations, when a vaccine will arrive, how badly the economy will be damaged, or what will happen if the virus returns shortly after things have gone back to normal.

For supply chain organizations, this scale of uncertainty is a big challenge. Supply chains rely heavily on plans and forecasts. They have to know how many items are needed at a specific time in a specific place. When the forecast isn’t accurate… well, we’ve all seen the empty aisles. 

Despite its unpredictability, we now know a bit more about how the virus affects economies and consumer decisions, and we can use this knowledge to engage in scenario planning. Scenario planning enables supply chain leaders to anticipate how the coronavirus disruption may unfold and identify both risk and opportunities. It also provides chief supply chain officers (CSCOs) with the data needed to demand investments in supply chain resiliency and agility—a challenging task when most companies are looking to cut costs. 

At Gartner, we have developed three scenarios that span the time until a vaccine is available. Those scenarios aren’t excluding each other. A version of scenario 1 could become reality in one industry, geography, or product, while other organizations face the consequences of scenario 2. 

Scenario 1: short-term disruption

This is the best-case scenario: While we have already seen a significant impact from COVID-19, the virus will ultimately be dealt with quickly. Local authorities will ease restrictions, and customer confidence will increase quickly. 

However, even under this scenario, business as usual won’t return, and supply chain organizations will not be the same after COVID-19. Before we enter the “new normal,” there will be a recovery phase to deal with. 

In this phase, demand sensing and insights into consumer sentiment will be key. Supply chain leaders must assess if customers are likely to take a more cautious spending approach. Based on the assessment of anticipated customer spend, they can then prioritize products by location, demographic, or other factors.

Prioritization of shipments will be important, because space on planes, trucks, and ocean carriers will be in high demand and result in increased costs. Not being able to secure freight space in time means that competitor products might reach the customer faster. 

The recovery phase is also the time to focus on employees—to thank and reward associates who have supported the organization through the crisis. Also, be aware that some crisis management team members may be close to burnout, having worked incredibly hard to navigate and respond to the COVID-19 crisis. Think about how to balance workload, rotating individuals out of crisis management teams if necessary. Responding to COVID-19 is a marathon, not a sprint, and requires engaged minds. 

Scenario 2: long-term disruption

This scenario describes a world in which the virus takes longer to contain, and restrictions remain in place for many months. Customer confidence declines, with a recession following.

This is a scenario where customer spending habits will probably change, as financial insecurity increases emphasis on personal financial resilience. Supply chain leaders must find out where customers are likely to make cuts and radically review their product portfolio. They will likely stop manufacturing low-volume and low-margin products and focus on products that make up the bulk of the organization’s revenue.

Under this scenario, financial insecurity will also impact suppliers—it’s fair to assume that some might not survive the crisis. CSCOs should pay close attention to supplier financial distress and customer credit risk. They must anticipate which suppliers will no longer be in business and the impact that this will have on being able to supply product during the pandemic or in a recovery situation. In this scenario, supply chain leaders should look for strategic opportunities to support suppliers, to purchase intellectual property, and to gain access to expertise or production equipment in anticipation of a delayed recovery.

Scenario 3: secondary crisis

After organizations experience either the first or second scenario, it’s also a possibility that a second disruption will follow—caused by COVID-19, a natural disaster, or other major incident. An example of a secondary localized disaster and disruption is Michigan’s Edenville Dam failure, which occurred on the May 20, 2020. While it’s difficult to predict what a secondary crisis could look like, there are certain learnings from the current disruption that will prove helpful. For example, when the coronavirus first emerged, supply chains saw a sharp increase in demand for personal hygiene products, while demand in the fashion and apparel industry declined. 

Also, supply chain organizations must consider the impact of the changing political landscape on their ability to move products between countries, as some nations are restricting the export of critical products. Medium-term forms of protectionism may mean that supply chains need to reconsider their network design and pivot toward more regionalized production. Those measures take time and must be planned and executed carefully.

In general, supply chain resilience should be a priority. Supply chain leaders should focus on opportunities to improve supply resilience and gain transparency through the value chain by identifying weaknesses and single points of failure. When a supplier goes out of business, it may result in the loss of key expertise and create difficulty with regionalization or localization of supply chain networks. Those situations can be avoided by either developing key skills inside the organization or purchasing external expertise.

Nobody knows what is going to happen in the upcoming months. That’s why a scenario-driven approach is best when preparing for the recovery phase—or a possible secondary crisis. The scenarios described above are just one set of scenarios that can be applied to map out a path to recovery and different scenarios may be relevant to different markets and products. Asking “what if,” “how fast,” “how severe,” and “how would we respond” allows leaders to identify both risks and opportunities associated with the coronavirus and provides a glimpse of certainty in those uncertain times.