Applying Scenario Thinking to Spend Management

Few know that one of the best general business resources on the web has been around for quite some time, pre-dating the blog world. Indeed, Knowledge @ Wharton, a free site, offers expert opinion on everything from the capital markets to operations research. In a recent edition, I came across a roundtable discussion between Jerry Wind, Paul Kleindorfer, and Colin Crook. The three are affiliated -- either as Professors and/or Fellows -- with The Wharton School of The University of Pennsylvania. While the discussion goes off in many directions, one part of it I found fascinating is how companies are beginning to take a scenario planning approach to modeling supply and operational risk.

The participants note that, "In the past six months, there has been an upsurge in the number of companies coming through INSEAD [the European institute for management education] looking for assistance in scenario planning and scanning, or determining the signposts that suggest which scenario or scenarios should be the focus. Some companies -- like Nestle, Unilever and Procter & Gamble -- have been doing some scenario planning, but it's been directed toward competition and technology. So these and other companies were completely blindsided by the recent increase in mineral oils -- which was spurred by a law in Germany requiring power plants there to burn 10% bio-fuel by 2010 - and its impact on the vegetable oils and other ingredients they purchase for their products."

"These sorts of commodity risks have escaped the scrutiny of many companies. Now they see a single government make a decision and it throws the profitability of an important ingredient out the window. So scenario planning and scanning, together with strategic modeling, intelligence and other issues, are really beginning to take on a much larger significance than before. It used to be about markets, technology and competitors, but now there's a much richer texture."

Crook chimes in and comments on this statement noting that "I think the supply chain concept is also having a significant impact on corporate structure. It originally brought together a whole bunch of previously disparate organizational elements of the business and integrated them into one service delivery capability that's fundamental to many businesses. Now I think you will see, organizationally, searches for the equivalent impact of a supply chain. Business organizations will be moving toward a capability approach rather than the classical functional approach."

As both a self professed Spend Management junkie and a scenario planning practitioner by trade, it's great to see the academics calling out the role of scenario thinking in the Spend Management world. Stay tuned in the coming months as I dig into how procurement and supply chain organizations can take a scenario approach to modeling risk and opportunity -- not to mention how to identify the sign posts that can be so critical to react before everyone else, turning what might become a crisis into an opportunity. It is precisely this type of approach that can create competitive advantage in the market, transforming Spend Management into something that can be truly strategic to the future of a business.

Jason Busch

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