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Planning for Uncertainty in 2012

As I look back on 2011, I’m reminded of the success stories and disruptions that occurred, but am also thinking about who is going to win in the year ahead.

On the economic front, 2011 was really about another year of uncertainty. A global economic recovery remains underway, although it is alarmingly long and slower than any other. The economy is likely to remain tepid, and job market recovery in the US will take years. Europe is grinding forward, and in all likelihood, we may see the end of Greece in the EU, and indeed, the question of the euro continuing forward in 2012 is questionable.

Ironically, we are still likely to see commodity prices rising on trend, the dollar weaken, but housing prices to remain relatively flat for a number of years. As one economist recently noted, “Fear Uncertainty and Doubt” are the reigning themes. Which means that in this environment, supply chain agility is more important than ever.

In a recent meeting of the SCRC on “Creating Agility in a Globally Volatile Environment”, a variety of executives provided a broad set of perspectives on the approaches that supply chain executives need to consider when building strategies for navigating difficult economic and disruptive minefields. (see updates on Multiple forms of volatility exist, from oil prices, currencies, commodities, and disruptive events, that are now part of the day to day backdrop against which we operate. Indeed, history has shown that we can expect a recurring pattern of one or more major disruptions every year.

In 2011, one of the first happened to be the Japanese Tsunami that wreaked havoc on the semiconductor and automotive industry, as well as the Thailand floods, which drove computer and hard drive manufacturers to get their fly fishing waders and poke around trying to determine how much damage they had incurred in their supply chain! In this framework, organizations have begun to think about how to find their way in rugged ecosystems, and how to co-evolve on those supply chain partners that they are now reliant on for business continuity. In terms of actions, I made a presentation at the meeting that boils down to the core steps shown below.

1) Engaging with stakeholders. In this sense, it is critical for organizations to really understand the core business drivers, above and beyond cost, that are important to business stakeholders. Stakeholders rarely care about cost. More important to them are the types of capabilities that ensure they are able to withstand the shocks that confront them in the business environment, and emerge as a dependable and reliable provider of products and services to their core customers.

2) Understanding the ecosystem. This capability requires a deep understanding of supply chain intelligence, and not the kind you find on websites. Moreover, intelligence gathering is often driven by understanding the right questions to ask first, and then finding the subject matter experts in your supply chain (or internally in your organization) who can put the question into context. Through this process, you begin to develop an understanding of the core risks, which leads to the next step of:

3) Developing Scenarios for Planning. Scenario planning is a function of how well your organization documents “Lessons Learned” or post-mortem experiences. This is a cultural norm in intelligence agencies and the military, where Lessons Learned associated from different events are integrated back into Standard Operating Procedures, as well as training materials. Setting up scenarios and getting the right people in the room allows you to then think about how to build the right responses, and the different sets of triggers that will drive either more information gathering, or trigger the right mitigation strategies in your supply base. Once you identify what you expect from your key supply chain partners, you need to then:

4) Building Relational Contracts. Relational contracts are not the standard legal agreements that we impose on partners using “our paper”, but rather identify the expectations and elements for measuring performance, as well as expected behaviors and methods of collaborating in the event of UNPREDICTABLE events. If we’ve done the right scenario building, we should be able to then drive the right type of planning with key suppliers, and ensure that they have the ability to carry out the requirements. For example, if a cyber-terrorist threat shuts down our networks, how do we continue to communicate and place orders? How do we ensure that we have inventory positioned at the right locations? And what are allocation expectations in the event of major disruptions? The final piece of this involves:

5) Enabling Rapid Response and Decision-making. Speed of decision-making and rapidity of execution once a decision is made is the final and perhaps most important step. The only way this is achieved is by being perfectly transparent with all involved, ensuring clear roles and responsibilities, a strong governance model over who directs activity across the enterprise in different situations, and a team of people who understand how to do this. When these elements are in place, the core parts of an agile organization are in place.

The last piece of advice to remember – Agility is about more than performance – it is about performance in context. It is not about being the smartest or fastest – but being smarter than the nearest competitor. Being the fastest can cost money. If you spend a lot of money becoming the fastest and most expensive, there are no guarantees this is what the business or the customer requires! Think about the antelope and the elephant – clearly the antelope is faster, and would be expected to win. But if the predator in this environment is the lion, the winner isn’t going to be the antelope, because strenth is the performance element required in this context. Similarly, business people as they move forward into 2012 the complex interrelated world need to think about these tradeoffs to manage. This is where the decision-support part of the business comes into play. Those who are the best at understanding the environment and are better at planning around scenarios will make the decisions that ensure they win.