More on Scenario Planning - 5 Thoughts for Surviving the Supply Chain Downturn

 "You can be wrong half the time and still make a fortune"

I am reading a fabulous book about managing your emotions as it relates to investing. The book is titled, "The Psychology of Money" and, as you can imagine, my mind went to supply chain strategies and how this psychology can apply. My mind also went to a theme I have been writing about relative to scenario planning. 

The quote above is from the lead page in Chapter 6 titled, "Tails, You Win". and it truly embodies a lot of what scenario planning is about. Here are the key lessons:

1. Your Business Plan Cannot Depend on Perfection:  Whenever I see someone developing a plan the first question I ask them is, "What if assumption [fill in the blank] is not accurate? What happens to the plan? If they cannot answer that question or the answer is the plan falls apart, then there is no plan. There are numerous sayings on this but it all comes down to not developing a plan which relies on a hole in one. Holes in one rarely happen. "The more you need specific elements of a plan to be true, the more fragile [the plan] becomes".
   
   
2. The Plan "Bets the Farm": The quote from the book which applies here is: "Few gains are so great that they're worth wiping yourself (or your business) out over. When I hear people say they are going to be the "Amazon of..." or the "Tesla of...." I know the plan is doomed. Going to Vegas and putting it all on one number is not a strategy.
   
   
3. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan. The follow on quote to this is, "you plan, God laughs". The author reinforces over and over again that "A plan is only useful if it can survive reality. And a future filled with unknowns is everyone's reality".  Bottom line is you must plan on the plan not going the way you want it to. 
   
   
4. Margin of safety / room for error: Allow for margins. It is one reason why leverage really can be a problem. Using leverage in financing removes a lot of the margin for safety and then you are back to violating rule 1 - you are hoping for perfection. 
   
   
5. Develop a barbelled personality - be optimistic about the future, but paranoid about what will prevent you from getting to the future. Andy Grove, founder of Intel, wrote a book titled, "Only the Paranoid Survive" and he was write. However, you must also be optimistic (not blindly) about the future. The future curve is almost always up and to the right for great plans as long as they meet these rules. 

These rules are just fantastic reminders of what makes a great business strategy and makes a business that can survive both the great times and the not so great times, like freight and supply chain entities are seeing now. 

Since it is July 3d and I am off tomorrow, I will leave you with a fantastic patriotic song. As a veteran, I am "Proud to be an American". 

Supply Chain Transformations Involve Many Elements - Thinking is The Most Important

It appears every supply chain I know of is in the middle of a big transformation. In many cases people misread the COVID Pandemic surge as a "new normal" and many invested heavily only to be shown that the idea of mean reversion is serious business. This is affecting even big and very sophisticated supply chains. Today we learned The Home Depot is even relooking at the supply chain efforts started during the COVID period (H/T: Supply Chain Dive). 

With great fanfare, just a few short years ago, Home Depot talked about the investment of $1.2 billion to create the "One Supply Chain". Today we learned they are now embarking on a $500M cost reduction in their supply chain as sales "return to normal".  This is happening all over as we discussed previously (Amazon adjusts) and is not unique to Home Depot. So, what are these transformations is missing? How do we whipsaw so quickly? Again, this is pervasive across many companies so I think it is worth thinking about. I have a few ideas. 

1. Strategy Duration: Many companies confuse tactics with strategy. Many companies also confuse short term "flash in the pan" with true change. I have always discussed the idea of mean reversion and have also used the statement "if something is too good to continue, it likely will not". Did anyone think the growth rates of 2020/2021 could continue indefinitely? So, strategically, should anyone have set up their long term capital investment and strategies around a growth rate that mathematically just could not continue? Lesson One: Strategy has to survive at least 5 years otherwise it is a tactic. 
   
   
2. Market First: Supply chain leaders and supply chains can sometimes get caught up in the science of running a supply chain but the leaders forget that all strategy has to start with the market then work its way back into the operations. I discussed this in my blog post titled: Go To Market Strategy Before Supply Chain Strategy
   
   
3. Scenario Planning: Many leaders forget this incredible necessary and powerful competency. As I wrote in my blog post: Scenario Planning - Face it, You are WRONG, predicting the future is a very difficult and dangerous business. In fact, I would say it is futile. However, what you can do is predict multiple futures and assign probabilities to each "future". You then can plan for it and also identify the key factors that you will monitor to determine which "future" is going to happen. The goal is to maintain optionality as long as you can. Don't commit until you absolutely have to. 
   
   
4. Change Management: Likely the most important part of any supply chain transformation is the idea of change management. You have to communicate, communicate and communicate along with doing the hard work of bringing people along with the transformation. 

So, have we learned any lessons here? Maybe. Although I fear the rush to supply chain automation could be another situation where supply chain industry think and FOMO is taking over. My prediction: in 5-7 years people will realize all this automation has made operations far too rigid and not agile enough to change. Much of it will get ripped out and as Elon Musk said in a tweet from 2018:

“Yes, excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated,” 

Strategy is hard work and it takes a lot of thinking. Humans are inclined to want activity and generally they do not believe thinking is an activity. But, it is the most important activity you can do in a transformation.  

The Who makes a return appearance in "Won't Get Fooled Again" (or, maybe we will):

Scenario Planning - Face it You are WRONG!

 I want to discuss some thoughts I have on scenario planning and why I think this skill is the future of supply chain management and planning. But first, let’s cover one thing and that is something you have to come to grips with: YOU ARE WRONG. 

As great supply chain managers, we all like to show how great we are with math and how great we are with developing algorithms to come up with “the number”. “The number” could be an ESOP number showing inventory requirements after detailed and exhaustive analysis of demand requirements or it could be something like what transportation or labor capacity I need to satisfy expected demand in the up coming months. Coming up with these numbers requires a lot of thought, a lot of data collection and the inevitable crunching of numbers. We then like to show everyone that these numbers are “the answer”.  As you can tell from what I titled this entry, I do not believe they are the answer. 

Rather, the supply chain manager should think of the number as the first step in a multi-step process to develop and document different scenarios which could occur. Think of this first number, not as the answer, but rather as the “base case”. It is a hypothesis. If all your assumptions come true then this number will likely be “the number”. Of course, in life, and in supply chain, all the assumptions almost never come true or develop as you planned them. I submit that almost every major event in the last 20 years in supply chain (2008 recession, 2020 COVID, etc.) were not in anyone’s base case assumption. 

Now that you are thinking of this number as just one possible outcome, what do you do next? Well, you build scenarios and you calculate what “the number” will be under all the different scenarios. You assign probabilities to those scenarios and, in some cases, you build out contingency plans to deal with specific scenarios, in advance, in case those scenarios come to fruition. 

There are many documented ways to think about this and for those who are academically inclined, I point you to a great research paper titled, “Next Generation Supply Chains” where they discuss the Gausmeier-approach to scenario planning and the Applied Approach to scenario planning. It is a great read to get the more academic base on scenario planning especially in supply chains. However I would suggest, after reading this article, you discover what will work in your company. How can you simplify it and bring it to the practical level.

I believe if you do this work, in advance, you will be much quicker in executing well thought out plans for each scenario that could develop. You will have thought about it in advance when you were not under undue pressure, you will have documented the assumptions and potential scenarios, you will have assigned responsibilities and tasks. All when you could think much more clearly. 

After all this is done, just like a great NFL quarterback, you can call the play and audible out of it with confidence and conviction that you have planned for the change of events and you have practiced it. 

Yes, getting “the number” is important. But, what is more important is that you admit that the number is wrong, and you plan for it.