2022 is beginning with substantial uncertainty and risk for businesses of all types. Much of this comes from the financial markets, and part of it relates to operating for 2 years in the pandemic. The list is long, but the main risks for demand planning and supply chain management are rising interest rates, shifting currency exchange rates, and price and cost inflation.

The interest rate risk is heightened by the planned normalization policies of central banks, including the Federal Reserve Bank of the U.S. Interest rates have been kept exceptionally low by central banks around the world, going back to the Financial Crisis more than 12 years ago. Rising inflation is forcing central banks to unwind their positions after years of accumulation and to increase their lending rates to banks.

Interest Rate Hikes Mean Changes In Demand

These will affect the cost of borrowing for businesses and consumers alike, in turn affecting the cost of inventory as well as the demand for products by businesses and consumers. For consumers who are acquiring products using debt (borrowing and leasing), the ramifications of higher interest rates can have magnified effects. Interest rates also impact currency exchange rates, adding more risk for global supply chains.

Scenario Planning To Mitigate Financial Risk

Now is the time for Demand Planners and Supply Chain Planners working within FP&A to begin developing risk scenarios for their companies, and to develop strategies to mitigate the financial effects for each. Given the number of risk elements for 2022, and the diversity of their effects by company and industry, scenario testing and planning is especially important. Contingency plans are essential in responding to changing conditions that will alter your product demand and business operations.

How Will Your Customers Respond To Interest Rate Hikes?

Consider how customers and consumers are likely to respond to interest rate changes and inflation in their budgets. For companies in your supply chain, how might they attempt to protect their margins with pricing that affects your costs of operation and your inventories? Consider how you can protect margins with price changes, and how that may affect demand for your products. Given the global nature of our businesses and the effects of currency exchange rates, how might company costs be affected by the coming changes in interest rates?

So, the scenario development and testing, and the development of contingency plans should be systematically undertaken. These should look at the effects on product demand, the effects on operational costs, the effects on inventory costs and financing, and how any ‘margin protection’ actions will impact demand.

How Will Your Responses To Risk Impact Your Trading Partners?

These issues you are facing are shared across all companies in the industry, and across all companies in your supply chain. The responses of each can be additive or multiplicative so Demand Planners need to create scenarios that fully incorporate the risk factors and understand the impacts of any resulting actions on our trade partners, as well as the effects of any actions taken by our suppliers and customers and consumers. Such scenario planning requires cross-functional participation to capture the many possible outcomes and risk factors. FP&A is essential to dollarizing each scenario and each course of action.

FP&A Must Dollarize Each Scenario & Response

Set-up a working group on a cross-functional basis with FP&A taking the lead in putting a dollar value on each scenario and response. This is not an operations forecasting process, but a scenario and contingency planning process. It is important for all members of the working group to realize this. Identifying the interacting elements and their effects on one another is essential. The process and the considerations are dynamic in nature, and will require iterations to test and evaluate the resulting scenarios.

Review these as a group on a regular basis to ensure prompt implementation of contingency plans and action. It is important to be prepared and it is essential to respond to the changing conditions on the ground in a proper and prompt manner.

Join us for IBF’s Demand Planning & Forecasting Boot Camp in Chicago from March 16-18, 2022. You’ll learn the fundamentals and best practices that turbocharge the value you add in your demand planning role. Trusted by Fortune 500 companies to onboard new hires, you’ll benefit from 2 days of expert instruction plus an optional supply chain planning workshop. Super Early Bird pricing now open – register now to secure your place at the lowest cost.

John Brown - Coca Cola

How often have you heard these words during a meeting in your office? “Say what?  Forecast for an unplanned event?  Isn’t that like buying flood insurance in Phoenix?

Regardless of whether or not we choose to plan for them, catastrophes happen. However planning ahead can mean the difference between success and failure when these situations arise.  Let’s look at the recent earthquake in Japan.  Should we forecast for earthquakes?  In Japan earthquakes are a daily occurrence so the answer should be yes.  Is it necessary to forecast for a 9.0 earthquake?  Maybe not, but it happened.  Follow the earthquake with a tsunami? This is definitely a possibility seeing how Japan has so many coastal regions.  Now we need to forecast a third contingent event, i.e. the damage to the Fukushima nuclear reactors and then identify and plan for the global impacts, especially in the electronics and automotive industries? OK, now this is getting ridiculous.

All of the above events happened and they will happen again. The event will probably not be an earthquake and most likely will not happen in Japan. But somewhere, sometime, you can be sure that we will experience another significant disruption to our supply chains.  Take for example, what just happened at the Shell oil refinery on the island of Pulau Bukom near Singapore. This is the company’s largest refinery, which just experienced a major fire and as a result has to be shut down as of 03-Oct.  What will the impact be?  Only time will tell.

So what message is here?  Simply put:  We must know and understand our value chains.  Where the dependencies and what are are the weak points.  What would we do if we lost manufacturing at site “X”, lost supply from supplier “Y”, or were suddenly unable to use shipping route “Z.”?  What if a pandemic broke out in the country where we have our greatest revenue base?  Each company and each value chain has unique characteristics.

We cannot afford to think only in terms of getting products made and delivered either.  We must think about the effects that risk events will have on the demand for our products.  As many have seen, when the economy tanks (also considered to be a risk event), the demand for durable goods declines and  purchasing discretionary items becomes delayed because consumers hunker down for the economic winter, and hope it doesn’t last too long.

I look forward to sharing my experience as the keynote speaker and meeting all of you at the upcoming Supply Chain Planning and Forecasting: Best Practices Conference in San Francisco. As far as Risk Management is concerned, don’t expect a simple answer because unfortunately there isn’t one.  You will, however, learn how to build a framework that can make you more prepared for the unknown – and plan for it.

John J. Brown, PE
Director, Risk Management, Supply Chain Development
The Coca-Cola Company

Hear John’s Keynote Presentation at: