Decoding the Black Swan Event on the Supply Chain

Decoding the black swan event

The term “Black Swan” is coined by renowned finance professor Nassim Nicholas Taleb in his 2007 book “The Black Swan”. He defines a black swan event that something that is impossible to foretell due to their extreme rarity yet having disastrous aftereffects. He advocates that it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly.

Countries of advanced industrial economies and their technologically advanced companies are linked by globalized customers and supply networks together with finely honed transport strategies that deliver JIT (Just-in-time). Normally, the existing system functions very effectively. Unfortunately, the system is also susceptible to events that are either not forecast-able or is able to forecast but not able to prevent it. The usual planning models and forecasting do not seem to or cannot capture the disruptive black swan event.

The challenge is how do we plan, factor and mitigate the black swan event damage?

One aspect of globalization has been the rise of Asia, as a manufacturing hub for supplying western markets. Indeed, since the 1980s, awareness of the potential for value creation by the use of low-cost Asian suppliers has resulted in the growth of high traffic while encountering different dynamics phased across the supply chain.

Supply systems increasingly demand effective forecasting, accurate and reliable logistics, and very flexible production models to ensure goods are available when and where needed and more importantly swift response to service the demand of the market or demographic.

Adoption of Just-In-Time (so-called JIT) quality and supplier partnership philosophy for value creation also benefitted both suppliers and buyers and further increased trades but usually this are best for stable conditions.

Analysis of the full cost of a black swan event whose likelihood can only be an estimate but whose outcome is so severe and so difficult that it calls for strategically bold and leveraged action. The company must gauge the impact of such black swan event and try to built-up a cost to shield itself from such a business crisis. It has to work-out cost-benefit analysis before such cost factoring is incorporated into business strategy.

Though it is impossible to plan for this black swan event, in a way one can never be able to create a plan for every single imaginable scenario but if the response to such scenarios are well-planned you can put the pieces back together promptly. Clearly seeing that you have a problem, or even a potential one, is the first step to solving it while having a unified view of your entire supply chain, both upstream and downstream.

We encourage supply chain solutions that re-looks at its risk profiles as a potential profit opportunity.

Understand the context and impact of the problem and possible solutions so you can make an informed next step:

  1. Collaborate freely: Identify which suppliers and customers are impacted, and then bring together the necessary people to collaborate on possible resolutions. As I always say collaboration is the first step to build up any business strategy. It’s about right partnering and working towards the Vison. The conventional approach not only accumulates vendors who don’t merge into the vision and goals, while also spend the huge cost to manage such vendors performance.
  2. Be Agile: The ability to react quickly to any developing supply chain situation is critical. But beware, it’s not just about the speed of implementing a solution. It’s also about how quickly one can understand the situation and its consequences and respond faster with the solution. The situation can be countered better and effectively through the trained and experienced staff while remaining customer-centric and building a strong partnership base. Do not just let the machine push the button! The human element is still a very important one no matter how sophisticated the technology you’re using.

In conclusion, with a few key changes to your supply chain risk management strategy, you can help minimize potential risks, and maximize the effectiveness of your response, in case the totally unexpected event really does happen. Hence, being aware and preparedness on the occurrence of such an event will help us mitigate the black swan event effect on Supply Chain.

This article has been authored by Rajesh Mehta, Chief Customer Strategy Officer & Executive Director, Liladhar Pasoo. All views expressed are of the author’s own.

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