October 29, 2015

Rethinking Black Swan Events for Modern Supply Chain Risk Management

Wayne Caccamo

Black swan supply chain events have been traditionally associated with (if not formally defined as) improbable, rare, or unlikely events that have severe or even catastrophic business impact. However, as a result of a number of socio-economic factors it’s time to update our view of black swan supply chain events.

A Black Swan Event is Not a Rare Occurrence

building-earthquake.jpgFor a number of reasons, black swan events are becoming less rare. It may sound logically inconsistent to describe such events as both becoming less rare and at the same time improbable or even unimaginable. How can that be?

It’s important to distinguish between the unique characteristics or circumstances associated with a singular event and the collective probability that at least one of these singular events will happen over a given period of time. After evaluating the surrounding context, looking backward domain experts (and in some cases even laymen) can usually conclude most black swan events are bound to happen and are destined to repeat themselves. Only the Chicago Cubs seem to defy this principle. Even though some parameters may differ (such as the event’s time, location, or specific type), it is likely that many similar incidences have had similar effects in the past and that this will continue in the future.

In fact, Yossi Sheffi, author the recently published The Power of Resilience guarantees that future disruptions are going to be bigger than anything we have witnessed to date because the past is bounded and the future is unbounded. He warns, “sometime in the future, something really bad is going to happen.”

SCRM Lesson: While black swan events may make headlines, they should be addressed with the same basic approach as all other supply chain disruption events and risks. According to Sheffi, a general capability and process needs to be developed to proactively identify, quantify, and prioritize risk scenarios for mitigation, as well as processes for early detection and rapid crisis response. After all, business impact of every day minor supply disruptions and delays in aggregate typically far surpasses that of the less frequent, but more severe black swan event.

The Frequency of Black Swan Events is Accelerating

Now that we are more comfortable with the notion that black swan events—though in many cases unimaginable, are not rare—it’s a small leap to accept that black swan events will happen with increasing frequency. Note, a key element of our black swan supply chain event definition is the degree of business impact. Globalization means that the impact of events is less localized and therefore more impactful. Further, a key driver for extreme weather-driven black swan supply chain events is climate change – a socio-economic challenge that will not be addressed or reversed anytime soon. Moreover, technology and hyper-connectedness of suppliers, brands, and OEMs make cyber disasters more likely and impactful. Finally, escalating geopolitical unrest can be one element of a perfect storm resulting in a black swan event.

SCRM Lesson: Don’t be preoccupied with the rarity, the unprecedented, or unimaginable nature of black swan events. This leads to a defeatist and illogical conclusion that supply chain risk management is futile. Focus on mitigating the business impact regardless of event timing, severity, type, location, etc. with proactive risk mitigation strategies prioritized by value-at-risk.

An Event Can Achieve ‘Black Swan’ Status Base on the Response Rather than the Event Itself

Hurricane Katrina (2005) may be considered a black swan event, but not because disasters of that magnitude were unprecedented, unimaginable, or that its particular location and specific type was unforeseen. Everybody knew that the city of New Orleans is at the base of a geographic soup bowl, whose brim once breached could lead to epic flooding. Hurricane Andrew back in 1992 raised that spectre. What most could not imagine is that an extreme weather event could wreak that much havoc in the U.S., and how poor the disaster preparation and federal crisis response could be.

SCRM Lesson: Planning and response preparedness can head off a potential black swan event before it goes down in history as such.

In sum, the general answer is to build a resilient enterprise that anticipates, prepares for, and responds rapidly to all types of events, ranging from the severe “black swan” variety to every-day supplier disruptions and delays.

Learn More About:  The Power of Resilience

Topics: supply chain risk management, supply chain event monitoring, SCRM Best Practices