Identify Leading Indicators for Scenario Monitoring Author: Xia (Summer) Xu Advisors: Shardul Phadnis Sponsor: BASF(Germany) MIT SCM ResearchFest May 22, 2014

Agenda Background Key Question Methodology Case Result Question May 22, 2014 MIT SCM Research Fest

Background Scenarios What is Scenario Planning Long range planning tool Not a forecast of future unknowns, but is used to understand the Driving Forces behind: PESTEL1 - Combinations of extreme variations of the Driving Forces Why Do Scenario Planning Driving Forces 3 4 5 6… Scenarios Strategy flexibility: Companies are able to tailor their strategies to different Scenarios - Improve decision making process: Stretch thinking - Organizational learning: Specific contexts facilitate conversation among different stakeholders Today’s business environment has never been more complicated. Factors such as rapid new technologies, regulations, environmental requirements and social changes expose companies to a complex surrounding. The challenge is even more so from a long-term perspective. PESTEL: Political, economics, social, legal, environment, technology 1-84 1PESTEL: Political, economics, social, legal, environment, technology May 22, 2014 MIT SCM Research Fest

Scenario Monitoring Background After Scenarios, Then ? Strategy A Strategy B Scenario Monitoring Explain the different scenarios Bring in scenario monitoring – talk about how monitoring is a part of the “scenario …” process, but is sustaining the tool. Using the most relevant data to ensure that your scenarios reflect reality and are accurate. Strategy C Strategy D May 22, 2014 MIT SCM Research Fest

Background Scenario Monitoring ++ Benefits + From thinking tool to practical one + Adaptable + Dynamic capabilities One way to solve problem is scenario monitoring Literatures discussed indicators but did not develop methods of identifying them May 22, 2014 MIT SCM Research Fest

Key Question Develop a systematic approach to identify leading indicators for Scenario Monitoring signals May 22, 2014 MIT SCM Research Fest

ü Key Question Understanding the Problem: What do Leading Indicators look like? Driving Force Time Lag Leading Indicators Time Tell why “leading” indicator is important … and how it is monitored: Scanning Tracking ü May 22, 2014 MIT SCM Research Fest

Methodology - Correlation with Time Lag Correlation test between driving force matrix and potential indicators is used to identify leading indicators Data: Driving Force Framework (Zheng He 2013) World Bank Develop Indicators (1364 Indicators) Thailand, Japan represent Asia Pacific (A/P) Step 1.Transform from qualitative descriptions to Indicator Framework (numeric) Example: Political Stability Refers to the stability of power / relations between state and various non-state actors Somewhere between slide 7 and 8, you need to mention that first challenge is make scenario = a qualitative story measurable. Ask a rhetorical question, so how would you measure that? Then tell that Zheng did this in his thesis last year – he developed a way to “measure” which scenario the world resembles. Then tell you are building on it to develop a method to identify the leading indicators. Zheng He(2013) defines the frame work of driving force in his thesis BASF 2011 May 22, 2014 MIT SCM Research Fest

Methodology - Correlation with Time Lag Step 2. Check Multi-trend Features of Driving Force Indicators to avoid Spurious Correlation Driving Force Leading Indicators Time Step 3. Correlation Matrix with Time Lag Time Serial Indicators under driving force framework T-1 Other indicators T-2 T-3 May 22, 2014 MIT SCM ResearchFest

Methodology - Filters Primary Filter：Correlation Test Secondary Filters：Data Availability Indicator Profile Predict Power Indicators 1364 700-900 30-40 10-20 Data Availability Correlation Test Indicator Profile Predict Power Validation: R2 Experts Judgments Potential Leading Indicators May 22, 2014 MIT SCM Research Fest

Case Results Demonstration: Country-----Thailand Driving force---- Political Stability Driving Force Indicator-----Armed forces personnel May 22, 2014 MIT SCM Research Fest

Case Results The Excel-base Tool Data Availability Scale Predictive Power May 22, 2014 MIT SCM Research Fest

Insights It provides… - A practical way of identifying leading indicators which is easy to understand and can be widely applied. - A common vocabulary for different stakeholders to communicate. Scenarios and Leading Indicators can be difficult to make sense of because they are often far in the future (Butterfly Effects). Future work: qualitative verification framework for further selecting leading indicators May 22, 2014 MIT SCM Research Fest

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