The following is this author’s weekly guest commentary appearing on the Supply Chain Expert Community web site.
On the Gartner blogging site, various supply chain analysts such as Matt Davis pen blog commentaries. Matt is a very talented industry analyst and I have enjoyed participating with Matt in past industry analyst panel discussions. Matt recently posted a commentary titled: Supply Chain Risk Management in 2012, which makes some observations that I tend to disagree with.
Matt’s premise seems to be that the term “Black Swan Events” , large scale, unpredictable disruptions in global supply chains is perhaps overhyped in business media and supply chain circles. He notes that globalization and the Internet have extended supply chains to far reaches of the globe, and thus added more vulnerability to global events. This author agrees.
The term “Black Swan” was described in a New York Times bestseller book by Naissim Nicholas Taleb titled “The Black Swan”. In that book, Taleb described a “black swan” as an event, positive or negative, that is deemed improbable yet causes massive consequences to either society or businesses. Thus, you could classify the term as one of a threshold event that leads to significant change.
What I do take issue to in Matt’s blog commentary is the statement: “I don’t think there are more black swan risk events than there were in the past, we can just see them now.” I suppose the implication is that technology and a 24 hour news cycle via the Internet has added more visibility to events that often occur. That is not the message that senior executives need to hear. I believe that it takes away from the fundamental evidence that indeed, something is happening in the frequency of highly unusual climate and natural disaster patterns, which is causing what experts previously described as “one hundred year milestones” to suddenly be much more frequent and much more impactful to supply chains.
Some select examples:
- The 2011 massive tsunami that impacted northern Japan
- The monsoon floods in Thailand
- The incredible 2011-2012 winter storms that impacted Europe along with past volcanic eruption in Iceland that forced a halt to air traffic.
- The shattering of records and economic destruction caused by increased tornados and now severe drought conditions in the U.S. Midwest.
The list can certainly be longer, and the point is obvious. Something unusual and unprecedented is happening across the globe and the frequency is accelerating. Whether we term it “black swan” or any other term, the point is that these events are causing major consequences of human, economic, corporate balance sheet and risk protection consequences.
For supply chain management, the real message regarding supply chain risk management in 2012 should be that today, every supply chain needs to have a supply chain risk mitigation and management plan. No exceptions!
That plan should consist of some analysis as well as needs for any revised strategy. The analysis reflects a message that every supply chain needs to be analyzed for potential vulnerabilities. Case in point, 30 percent of the global supply chain capability in hard disk drive manufacturing was clustered in Thailand. Certain companies found the majority of their supply of certain components eliminated by the Japan tsunami, requiring months of recovery and herculean efforts by supply chain teams. The suspension of air traffic in Europe pointed to the importance of back-up transportation or alternate air hubs. Analysis also leads to the ability to identify specific components in the entire bill of materials that are most vulnerable to revenue achievement as well as the ability to practice scenario-based planning techniques. Analysis leads to the data that drives revised strategy in sourcing and risk mitigation so that a supply chain has some basis of resiliency.
As these events continue to occur, teams should be able to immediately identify if the situation presents moderate risk and initiate a pre-defined mitigation and response plan. The message to senior management is that occurrences of major climatic and natural disaster events are rising, and are not one-time events, and that the supply chain has to have some form of risk identification and mitigation planning.