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Scenario Planning
Scenario planning is the practice of developing multiple forward-looking plans to evaluate risk, opportunity, and trade-offs before decisions are made 🔮. In IBP, scenarios are the vehicle for presenting choices to leadership — not just showing what the plan says, but showing what happens under different assumptions.
Scenario Planning:
The structured development of two or more alternative plans, each built on a distinct set of assumptions about key business drivers, to enable informed decision-making under uncertainty.
A single-point plan creates a false sense of precision. The demand number is not a fact — it is a projection based on assumptions that may or may not hold. Scenario planning makes those assumptions visible and testable.
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Why "Best / Worst / Most Likely" Falls Short
Many organizations default to three scenarios labeled best case, worst case, and most likely. This approach has two problems:
- It encourages anchoring. Leadership gravitates to the "most likely" scenario and treats the others as noise. The best and worst cases become performative — nobody seriously plans for them.
- It lacks specificity. "Best case" is not a scenario — it is a wish. A useful scenario identifies what specifically changes and why, so that leadership can evaluate likelihood and prepare a response.
A better approach is driver-based scenarios. Instead of labeling outcomes, you identify the key driver that creates uncertainty and build each scenario around a different assumption for that driver.
Examples of drivers:
- A major customer's volume commitment (confirmed vs. reduced vs. lost)
- Raw material cost trajectory (stable vs. +10% vs. +20%)
- New product launch timing (on-time vs. delayed one quarter)
- Regulatory change (approved vs. delayed vs. rejected)
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How to Structure a Scenario
A well-constructed scenario follows a consistent framework so that alternatives can be compared on equal footing. Every scenario should include:
- Key driver — What is the single most important variable that differs between scenarios? Name it explicitly.
- Assumption — What specific assumption does this scenario make about the driver? Be precise (e.g., "Customer X reduces volume by 15% starting Q3" not "demand is lower").
- Volume / revenue impact — Quantify the demand change. How many units? Which product families? Which geographies?
- Financial impact — Translate to the P&L. What happens to revenue, COGS, margin, and cash? Use the same financial model as the base plan (see Financial Planning).
- Probability assessment — How likely is this scenario? This does not need to be precise — a qualitative scale (high / medium / low) or a rough percentage range is sufficient.
- Timeline — When would the impact materialize? Is this a next-quarter issue or a next-year issue?
- Recommended action — What should the organization do if this scenario plays out? What decisions should be made now to prepare?
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Scenario Comparison: An Example
The following tabbed panels illustrate how three scenarios might be structured around a single driver — in this case, the volume commitment from a key customer.
Driver assumption: Customer X maintains current volume commitment of 200K units/year.
Driver assumption: Customer X reduces volume by 25% starting Q3 due to competitive switching.
Driver assumption: Customer X exits entirely at contract renewal in Q3.
This format gives leadership what they need: clear assumptions, quantified impact, and a recommended course of action for each outcome.
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Scenario Element Checklist
Use this table when building scenarios to ensure completeness and consistency across alternatives.
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Presenting Scenarios to Leadership
Scenarios are only useful if leadership engages with them and makes decisions. A few principles:
- Lead with the recommendation. State what you think the organization should do up front, then use the data to support it.
- Limit to 2-3 scenarios. More than three creates decision paralysis. Pick the one or two uncertainties that matter most.
- Make trade-offs explicit. Every option has a cost. Leadership decides trade-offs — but only if they can see them.
- Include a "do nothing" baseline. Always show what happens if leadership takes no action. This creates urgency and frames the value of the recommended actions.
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Scenarios in the IBP Cadence
Scenarios are not built in isolation — they are a product of the IBP cycle and they feed into its decision-making forum.
When scenarios are built: During financial reconciliation, after demand and supply plans have been translated into a financial projection. The finance team identifies key uncertainties and constructs 2-3 scenarios around them.
When scenarios are decided: At the Management Business Review (MBR). Leadership reviews the scenarios, evaluates recommendations, and makes go/no-go decisions. Approved actions are loaded into the next cycle's plan.
What happens next: The selected scenario becomes the updated plan. Approved gap closure actions get tracked through the next cycle. Unselected scenarios remain on file as contingency plans.
The goal of scenario planning is not to predict the future. It is to prepare the organization to respond to it. A team that has already modeled the impact of a customer loss, a cost spike, or a delayed launch can act in days when the event occurs — while a team that planned for a single outcome will spend weeks figuring out what to do.