Analytical alternative to the crystal ball

An analytical alternative to the crystal ball

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6 minute read 28 Nov 2022
Related topics
Strategy by EY-Parthenon
Consulting
Strategy and Transactions
Supply-chain
Technology

Based on data and fundamental analysis, scenario planning will help guide entrepreneurs through the current stormy weather.

In brief

  • For companies, scenario analysis is always an eye opener to contradict or reinforce gut feeling, also to make connections clear and enrich policy.
  • Technology gives a tremendous visibility that allows to better organize and run a business
  • It’s not about choosing the most extreme scenario’s but the most likely. 

One crisis follows another and disruption is accelerating. But companies don't have to sit idly by while all this happens; they can also take advantage of it. With data and fundamental analysis they can develop objective scenarios to emerge stronger from the crisis. The code word: transparency.

Should companies sweat out the crisis?

From a supply chain perspective, the disruption is obvious. The energy crisis and the Russia-Ukraine conflict, which has a big impact on European supply, are only a few externally induced pressure points for entrepreneurs. Recently there was the blockage of the Suez Canal and the covid crisis, but actually disruptions have been present for a decade. At EY, we don't focus on dealing with disruption, but we do focus on the opportunities that come along with it.

It is not about waiting for the storm to subside, but rather actively engage with the changes and use them to reinvent yourself. Digitalization, decarbonization ... companies are already dealing with those challenges, that hasn't changed. Moreover, to a certain extent business is always unpredictable. Inflation may be the biggest uncertainty now, but the root cause lies much deeper.

The maturity of technological advances has risen to the point where there are answers to offer today to classic supply chain issues. And the interesting thing is that that technology can also offer answers to today's challenges. Take the end-to-end visibility in the food sector for example. From field to fork you can inform people about what is on their plate. Where do my raw materials come from and how can I best use them. 

You shouldn't wait for the storm to pass , but rather actively engage with the changes and use them to reinvent yourself.

Joeri Snijers

EY Parthenon Executive Director

Is historical data still useful?

Technology gives you tremendous visibility that allows to better organize and run a business. The availability of data has become much greater to make objective decisions and predictions. Often this is done based on past data, and companies struggle with that. There used to be the human bias, the gut feeling that weighed heavily in decision-making. That could be objectified based on data. But now there is also data bias. “But those data apply in a covid year,” is a much heard phrase nowadays. However, it is technologically perfectly possible to deal with this bias in a smart way. While historical data have to be treated carefully, the big trends remain visible. 

The availability of data to make objective decisions and predictions has become much greater.

Tom Van Herzele

EY Belgium Supply Chain & Operations Partner

It is true companies need to bring in other competencies for that. The war for talent is heavily playing out in the field of data analysts, but it doesn't stop there. Due to cost-cutting interventions, some people need to be given other tasks: from manual labor to configuring programs, for example. Not all companies are ready to handle those skills yet.
 

How EY can Help

How is my business structured?

More than ever, data goes directly to the backbone of the business: which four, five buttons determine 80 percent of the story and which buttons should absolutely not be pushed? You have to ask questions about what you're good at and what you're not, what you should invest in and what you shouldn't, where your opportunities lie in this environment, ... For companies, a scenario analysis is always an eye opener to contradict or reinforce gut feelings, but also to make connections clear and enrich policy.

 

Data supports decisions and the decision-making process in the organization. A thorough data analysis will always trump a gut feeling, also towards investors and shareholders. For example, the visibility in a company’s supply chain will allow them to assess risks better, especially in this disruptive world. Many choose to source raw materials closer to home again instead of putting everything on a ship from China. Knowing where commodities come from is important for creating the right risk profiles. Nowadays you can draw up a risk profile of your entire network.

 

The importance of transparency

 

Take the example of coffee beans. Big players want to know which plant each bean comes from. Is there deforestation behind the planting? As sustainability is an additional driver these days, you want to be able to prove that the consumer's cup of coffee also benefits the coffee farmer's local community and is not an environmental attack. Europe is a pioneer in this and writes legislation to that effect. Therefore you also need that visibility and transparency to be able to continue to produce. That's a great example of an opportunity.

 

What exactly is scenario analysis?

 

Breaking down the company to its smallest building blocks to understand which factors are the most important for to the business and how they will evolve is crucial in scenario planning. Crystal balls are mythical and magical things, instead it’s necessary to consult with all stakeholders and all departments in the company about the most plausible scenarios: detecting and quantifying to understand which elements need to be followed up on.

 

And when a certain path is chosen, it is important to consciously act on it. It's about consistently continuing to monitor what's happening around you. So you have to stay focused and responsive. It's not choosing the extreme options, it's choosing the most likely path.

 

Distribution monitoring

 

This permanent monitoring is very important, especially for distribution networks. Take sports shoes for example: How do my products get to my customers and where should I then plant my production centers and warehouses? Such exercises used to be done roughly every five years. Nowadays, you have to bring in one or two employees full-time to optimize even within the existing model. How can you reduce transport costs, with which means of transport? That is an ongoing process. If your distribution center is in our country, you can't deliver to, say, Spain within 24 hours.

Knowing where your commodities come from is important to create the right risk profiles.

Tom Van Herzele

EY Belgium Supply Chain & Operations Partner

How do you stay competitive?

Scenario analysis is a comprehensive story of data, financing, taxes, supply chain, digitalization, footprint, ... It’s necessary to understand the whole spectrum and that is a complex exercise. But only companies that understand how their business is put together, what buttons to push and where the strength of their business lies will be able to benefit from that in the future.

In the past, cutting costs and optimizing cash flow might have been enough to get by. Today, that's not enough. Companies have to look at whether they are competitive: does something still make sense to put effort into? Maybe something is scoring particularly well? And what about the competition? There could be an interesting acquisition there. Companies need to have a good grasp of how costs run through their business.

Also when it comes to negotiations with suppliers the cost structure must be clear. It’s key to be transparent. Customers and suppliers don't want you to go bankrupt, or they will end up in a weak position themselves. And energy and labor costs are indeed rising sharply. Moving to Asia can sometimes be interesting, but what about Belgian production units? Deploying more customization, might be an answer. When companies monitor well, they can switch quickly. And records show, cost-efficiency and sustainability go hand-in-hand.

In the past, you might have been able to get there by cutting costs and optimizing your cash flow. Today, that's not enough.

Joeri Snijers

EY Parthenon Executive Director

Cash is king

When companies end up in negative cash flow they can no longer manage their business themself and they are no longer in control. Only when a company has surplus cash, can they actively take action and make decisions. Accounting-wise, everything can be correct, but you can only do business with what is in your bank account. A lot of companies have debts on their balance sheets after the covid crisis. These have to be refinanced at higher interest rates. Everyone senses that a storm is coming and we need to be prepared to face these new weather conditions. 

Summary

For companies, scenario analysis is always an eye opener to contradict or reinforce gut feeling, also to make connections clear and enrich policy. Joeri Snijers and Tom Van Herzele of EY explain how scenario planning can be an analytical alternative for a crystal ball.

About this article

Authors

Related topics
Strategy by EY-Parthenon
Consulting
Strategy and Transactions
Supply-chain
Technology

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