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Scenario Planning or Simulation? Making the right choice

Scenario Planning or Simulation? Making the right choice

Recently I was speaking with an industry analyst about our AI-Simulation Platform and challenges in the supply chain planning sector.

The analyst saw the great value that digital twins are delivering for companies in a variety of supply chain environments but explained that there was still a lot of confusion in the market when it came to simulation.

Companies think they are simulating but they really aren’t, she explained. What they are really doing is scenario planning. What’s more, it isn’t only users that are confusing scenario planning and simulation – vendors in the supply chain space are doing that, too.

Scenario planning and simulation are similar but still very different approaches to aid in setting future strategies. While both can be used to help move a company to a more robust, resilient, and sustainable future, there are some important reasons why simulation should be a company’s first choice.

Scenario Planning:
Multiple Futures

Scenario planning is a process of visualizing what future events or conditions are probable, what the impacts of these conditions and events would be and developing plans to respond to and optimize performance in these future states.

Scenario planners do not put all their planning eggs in the same basket. Typically, a planner will generate between 3 and 5 different scenarios based on their best-estimates of what the future might hold. For each of these scenarios they will generate strategies that will allow their company the best chance of meeting targets.

As the future reveals itself, decision makers can align their strategies with those that perform best in the scenario that matches reality.

But there’s a problem, three of them, in fact.

First, when you reduce an infinite number of futures to less than half a dozen choices you are almost assured of being wrong.

Second, even the most complete scenarios will not be able to include all the components that might impact the future, and this means there will always be inaccuracy and a lack of granularity.

Third and importantly, it is not simple to adjust a scenario when new information emerges – the handful of scenarios that are developed will most often stay as they are no matter how the world evolves.

Little wonder, then, that planners look to simulation to help them predict what will happen next.

Infinite Futures

Simulations imitate the operation of real-world processes or systems thanks to the use of models. The models represent the key behaviors and characteristics of a process of the system and the simulation represents how the model evolves under different conditions over time.

Simulations are at the core of Prescriptive Simulation Twins. They simulate dynamic scenarios – even those same scenarios that the scenario planner might develop – and answer all the what-if questions that a decision maker might have.

However, unlike scenario planning, Prescriptive Simulation Twins simulate hundreds, thousands, or even hundreds of thousands of different scenarios. These simulations can be done simultaneously and the most minor changes to a specific assumption or an entire scenario can be simulated. Want to simulate what happens if growth is 2.9% or 3.1% instead of 3%? A few clicks and it is done. 

As complexity increases simulation helps uncover the sometimes counterintuitive consequences of a decision. Unlike scenario planning, simulation can identify the cascading effects that emerge when a particular threshold is crossed or time period is reached.

In addition, Prescriptive Simulation Twins also generate the operational and strategic plans that decision makers can pursue to reach their targets. In that way, simulation doesn’t only offer a vision of all possible futures but also the way to meet goals no matter which future emerges.

Simulations offer richer, more detailed, and more holistic visions of the future ahead. As this future emerges and new information is available it can be integrated into the scenarios, a new simulation completed, and the resulting plan continuously optimized.

Scenario Planning vs Simulation?
No Contest

It’s easy to see why there is confusion between Scenario Planning and Simulation. Both are means of predicting various futures and developing plans to meet targets in those futures. But there are some significant differences between the two that are important to understand.

Scenario planning limits itself to a handful of futures with a single static plan to ensure targets are achieved if that prediction matches the real-world.

Simulation, on the other hand, tests near-unlimited scenarios simultaneously and Prescriptive Simulation Twins can generate individual operational and strategic plans for each scenario.

Far from static, these simulations and dynamic plans can be updated with new information in real-time and decisions optimized to ensure goals are met no matter how the future unfolds.

After first finding a market in critical industries such as nuclear energy and public utilities, today simulation is a trending topic in all sectors.

Manufacturers and retailers are embracing simulation because, for executives tasked with making optimal choices, there’s really no contest: the advantages of simulation and the incredible power of Prescriptive Simulation Twins offers the best path towards a robust, resilient, sustainable, and successful future, whatever form that might take.