Rising gas prices: the art of anticipation in a changing environment
The unprecedented increases in energy prices continue to make headlines across Europe. Over the coming year, consumers could end up paying 50% more for gas and electricity. The effects on businesses are also becoming clear; a number of manufacturers of products including artificial fertilizer and aluminium have already scaled back their production activities because the energy costs are simply too high. The seemingly sudden onset of this energy crisis is a prime example of how developments can sometimes have a bigger impact than expected. The question is: could we have seen this coming and could the panic have been avoided?
The art of anticipation
When faced with uncertainty and fluctuating supply and demand, it is difficult for any organization to anticipate and react appropriately. We tend to focus mainly on production efficiency and cost control, which is logical – and feasible – in a stable and predictable environment. Nowadays, every organization knows how important it is to be prepared for unforeseen disruptions in order to improve their agility and anticipation skills in a changing and uncertain environment… in other words, to be resilient. The following three factors play an essential role in this:
- Access to relevant information
- Making the right trade-offs
- Effective and efficient decision-making
Relevant information is crucial
Before setting to work to improve your organization’s resilience, it is first necessary to ensure that the required information is both accurate and available from your own sources, systems and statistics. But aligning data from different disciplines, departments and regions to gain an integral view can sometimes seem like a ‘mission impossible’ within many organizations.
Moreover, in a rapidly changing world, it is no longer enough to gather data and information within your own four walls only; you also need insight into external trends, developments and risks that could affect your customers, competitors, suppliers and partners. Make sure you use the right intelligence in order to spot any signs of potential problems, including an estimation of their probability, possible implications and likely timing. These ‘early warning systems’ are crucial to your ability to anticipate and respond in good time. This calls for supply chain visibility and knowledge; you need to understand your role and position within the supply chain and to build – and maintain – the right coalitions and partnerships.
Making the right trade-offs
Besides ensuring that the relevant information is accessible, it’s essential to make the right trade-offs, such as whether or not to invest in inventory, whether to scale production up or down, and whether or not to train/hire staff. In the case of all these decisions, it’s important to also weigh up their consequences for various disciplines, departments and regions. During a crisis, for example, the Finance department might want to focus on reducing costs and working capital, whereas Supply Chain prefers to build up a buffer and wants to invest in stocks. In fact, decision-making always revolves around making trade-offs, especially in times of uncertainty.
Effective and efficient decision-making
Integral decision-making is often a huge challenge in complex organizations and supply chains. The key to success is an effective and efficient approach to that decision-making.
To achieve organizational resilience, you continuously need to be able to make the right short-term (operational) and medium-term (tactical) decisions. The short-term decisions are aimed at guiding the organization through the crisis, and this is often where the immediate focus lies. Organizations commonly find medium-term decisions more difficult, but making the right tactical decisions can help them to emerge from a crisis stronger. They can often even create a huge competitive advantage, such as by gaining market share by continuing to fulfil orders during a crisis while their competitors suffer delivery problems.
Incorporate resilience in Sales & Operations Planning (S&OP)
Generally speaking, organizations that have incorporated resilience into their planning and decision-making process are better at anticipating uncertainty and supply/demand fluctuations. In fact, increased agility is a must nowadays, so it can be wise to incorporate resilience into your organization’s planning and decision-making mechanisms. The Sales & Operations Planning (S&OP) process is ideal for this.
The S&OP process is a powerful tool for supply chain optimization and for embedding resilience in the organization. It’s an instrument that supports the business objectives, including in changing and uncertain environments.
So coming back to the current energy crisis, could it have been avoided by the right information and decision-making? That’s difficult to say. It depends on whether the right person had access to the relevant information in order to make the right trade-offs. If so, perhaps the gas reserves would have been increased sooner and an effectively organized decision-making process would have ensured better alignment between supply and demand.
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