All too often, when it comes to strategic planning within procurement, we rely far too heavily on traditional planning techniques that take a completely numbers-driven finance and accounting (F&A) approach to forecasting and planning. Now, don’t get me wrong – there’s a place for number crunching and our beloved Microsoft Excel as we plan for the future. But in today’s rapidly changing and uncertain economy, we must supplement old approaches with new if we’re to succeed in analyzing and preparing for the future.

After all, no traditional planning technique would assume 50 percent volatility in the price of key commodity inputs over a 12-month period. And certainly no F&A-based financial model would think to include a similar 50 percent demand variability for our own new customer orders, even as an outlier forecast, based on the behavior of the market in the past fifty years. But these are precisely the types of examples that did occur in many industries in the past 18-months. And few procurement organizations were ready to rapidly implement planned approaches to deal with these types of changes, let alone predicting them and knowing what to look for in detecting them in the first place through better planning.

Making sense of a new world

Traditional financial and strategic analysis works great when the world is headed in a similar direction as the past, with 10-15 percent variability or less in projections. But the world we live in today is very different. Companies need not only plan for uncertainty – they need to learn to make sense of it as they forecast how their organization should look and respond to particular events and contingencies 12, 24 and even 36 months out. Moreover, if you can begin to identify the particular signposts or tip-off events that suggest a particular market is headed in a certain direction before others can, it can provide a huge competitive advantage. This is the distinct advantage that proper executive scenario planning can provide. Scenario planning techniques do not assume the future will present the same largely linear line “up and to the right” or “down and to the right” forecast year in and year out. They take a radically different approach focused on predicting not just what is likely, but what types of outliers are possible and how we can learn to plan for and identify them as early as possible.

Deeper understanding

Historically, there have been two schools of thought in scenario planning. One, introduced by Shell over thirty years ago and later adopted by Global Business Network (GBN), uses a small team approach that attempts to plot potential futures in logical frameworks, often 2 by 2 models, based on a constrained set of parameters a team identifies, examines and fleshes out. Today GBN still relies on scenarios as a core-planning tool, suggesting, in their words, “the point of scenario thinking is not to write stories of the future. Rather, it is to arrive at a deeper understanding of the world in which your organization operates, and to continue to use that understanding to address your most critical challenges – from strategy, risk assessment, and innovation to visioning and executive intelligence.”

The second model, which I was originally trained in as a young consultant, was created originally by a spinout of Arthur D. Little in the 1980s (the firm who pioneered this model, if you’re curious, was Northeast Consulting, also known as NCRI). Their approach uses a technique that paints three-to-five radically different futures and brings executives together in a team-based environment to work through a set of materials. This takes place in a highly prepared one to two day workshop that rigorously guides team members through what makes each particular scenario possible, points of scenario overlap, intersection and divergence and ultimately, how different scenarios can often unfold and work together over a finite time horizon (e.g., 3–5 years). The NCRI approach –and variants of it – are also essential for providing executives with a list of sign posts to monitor and look for that can show if, when and how quickly a particular scenario which they planned for and rehearsed in the workshop environment is actually happening. In some cases, organizations combine these types of scenario planning approaches with similar exercises using prediction markets, war gaming and other strategic techniques to better plan for the future.

Act on your conclusions
Regardless of which approach you end up choosing when it comes to strategic planning for the procurement function, it is possible to apply scenario planning to a range of issues, from the really big (e.g., the future of China) to the highly targeted (e.g., commodity forecasting and planning). Indeed, scenarios can scale up and down to address the task at hand. But it’s critical to remember that scenarios require a different mindset and openness among team members participating in the strategic planning and strategy implementation process. After all, all the hard work that goes into envisioning the future and rehearsing how to react to changes in the market will be for naught if an organization is unwilling to act on the recommendations and begin to monitor the environment around them more closely after going through a scenario planning process.