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Reacting to Market Changes with Agile Scenario Planning

Posted by  Stéphane Bonutto

While the economic environment is getting increasingly volatile, processes and tools are not always available to support taking the right business decisions. This blog explores how to identify the right drivers to monitor and how to build flexible scenario templates.

The goal is to safeguard the bottom-line result

It is likely that a budget will not always materialise as expected. This calls for ad-hoc actions. In a favourable market situation the necessary actions are rather easy to decide, since their purpose is to gather the additional resources to cope with the increasing demand. In a market downturn however, the required actions are more difficult to take, since their goal is to reduce cost. It is essential to react quickly and to try and maintain the expected profit margins. In this context, the finance team need to have the right modelling tools available to estimate the financial impact of the alternative decisions.

Is forecast the adequate tool?                                                     

While it is the responsibility of the operational managers to implement the decided actions, finance must provide them guidance. This means explaining how the company’s results may change depending on the possible action taken. The usual process used to recalculate the company’s results, the P&L and the KPI’s is forecasting, depending on the revenue impacts. However, in my experience forecasting does not allow for review of several alternatives, due to timing and content requirements.

First the forecast only takes place on a scheduled timetable, e.g. monthly or quarterly, so there is a time lag between updates. Second the forecast only shows one picture of the estimated future company results, with no alternatives. Modelling these alternatives is the purpose of scenario planning. Only the most probable scenario should be reflected in the next forecast. Alternatives to the submitted forecast should be documented as risks and opportunities to the key lines of the P&L, cash flow and working capital.

Identifying the drivers

In a manufacturing plant I implemented scenario planning to assess the financial impact of several different production models that met the quantities requested by the sales organisation. The scenario planning process involved logistics, manufacturing engineering and finance. The first two departments quantified production related drivers.  For example, the various production schedules, the shift models and the required staff numbers depending on the hours per product. Finance assessed the other cost drivers and calculated the final product cost using a specific modelling tool.

Agile scenario planning requires detail and speed

Since a market can change very rapidly, it is a good idea to mentally prepare the organisation to be able to perform recalculations regularly and quickly, even if these require intensive work. The people involved need to understand that these scenario calculations are an essential method for optimising resources and achieving product margin targets despite a difficult market situation.

Agile scenario planning requires the right tools. These tools must be simple enough to enable quick simulations and swift decisions, but detailed enough to return an accurate result. It is therefore necessary to identify the cost drivers upfront and include them in the integrated simulation tool.

I had a good experience with a tool consisting of two templates: a rapid one and a detailed one. With the rapid template, the managers could quickly assess alternatives on their own based on a reduced number of drivers. Generally, they would choose one or two scenarios from this initial directional assessment and send them to a specialist team. This team would then perform the necessary calculations on the detailed template. The detailed template was based on a higher number of drivers and returned an accurate and more reliable decision basis.

What to do with the scenarios?

Choosing one scenario and reflecting it in the next forecast is certainly not enough. It is often difficult to decide when it is right time to implement each scenario based action. It is first necessary to recognise when the anticipated market change has effectively materialised. Then it is important that management demonstrate courage when explaining to staff that these actions are required to protect the results of the company.

Stéphane Bonutto

Stéphane Bonutto has worked in various multinational companies such as Schott Glas and Adam Opel AG in Germany, Switzerland and Italy where he was responsible for commercial finance / pricing and manufacturing finance. He then moved to Oerlikon Balzers to work as Head of Finance / CFO for Germany and then for Europe. 

During his career, Stéphane designed and implemented Finance Planning & Analysis tools to drive the performance of the organizations. He also has worked on processes and organizational capability to bring his finance teams to the next level.