A black swan event is an unforeseeable event that is utterly catastrophic. Such catastrophes, by sheer destructive power, justifiably draw attention to how critical supply chains are to sustaining business success.
These events are inherently unpredictable, but studying the kinds of companies that are able to weather such catastrophes leads to some key lessons about how corporations can develop the resilience to respond to and mitigate the deleterious effects of a black swan.
It must also – from the outset – be borne in mind that everyday supply chain incursions – such as poor quality, missed deliveries, and wrong information about delivery times – can be much more damaging to a brand than a “black swan event.
However, to begin, we can debunk a common approach recommended to businesses to prepare for black swan events in the supply chain, and then examine clear and simple steps every corporation can take to considerably improve supply chain resiliency, regardless of the nature of the threats posed.
The advice you’ll hear, time and time again, to address black swan events is to run simulations of possible events that might occur, and then stress test your response mechanisms.
Unfortunately, this is easier said than done.
For one, it requires considerable scale and investment to simulate all possible scenarios. Governments and armies run simulations of disasters and game plan responses to them. Most businesses cannot afford the luxury of running such vast simulations.
The other problem is that planning, even after simulation, is very difficult. Nobody thought of a specific 9/11-type tragedy as being possible before it happened. Likewise, while people were aware of the potential devastating impact of an earthquake or a tsunami around Japan –nobody could foresee that this would be coupled with the whole Fukushima nuclear reactor leak, which considerably compounded the problem.
Key Steps to Prepare for a Black Swan
So what can be done? There are some key steps that corporations can take to ensure that when a black swan event does occur, they are able to respond to it in a timely and effective manner. In this article, we’ll look at two of these steps, and explore how they tie into fundamental issues regarding supply chain risk and resilience.
Step 1: Connectivity and Digitisation
By enhancing connectivity with supply chain partners and digitizing information so that there is a single consistent version of the truth, enterprises can ensure that when a disruption occurs, their entire supply chain can respond in unison, off the same playbook.
The importance of this cannot be overstated – it is critical for enterprises to enable all their partners to join their commerce networks. This is especially crucial to ensuring the health of these supply chain partners.
Thus, suppliers can choose to explore alternate delivery lanes if a specific one is disrupted. Other suppliers may proactively pick up the slack if a group of key component suppliers are disrupted by a black swan event. Carriers can decide how to realign their shipping containers and fleets based on early notification of such issues.
Step 2: End-to-End Visibility
Visibility is a much abused and oft-bandied about term in the supply chain. For the purposes of this discussion, let’s define visibility as true end-to-end visibility into everything impacting inventory in the supply chain – which starts with forecasts and purchase orders and runs all the way through to final delivery and settlement.
Each component process affects the others – for example, a supplier that is not paid in time and has an adverse cash flow situation may be unready to execute a future order. Similarly, inaccurate forecasts may result in the wrong setup of the manufacturing line, and thus render a supplier unable to deliver the parts or products required.
Having holistic-yet-granular visibility and control allows for quick identification of potential trouble spots in the event of a black swan event, and enables rapid responses to ameliorate the adverse impact. There are several well-documented cases of companies that identified shipments that might have been impacted by the Japanese earthquake and tsunami and prepared alternate plans to mitigate the damage. Dow Chemicals is a high-profile example of a company that anticipated that its orders were in the path of Tropical Storm Bill, and was able to work proactively with its customers and downstream manufacturers to ameliorate the potential impact.
In part two of this article, we’ll explore further steps that can help companies be vigilant and responsive when confronted with black swan disruptions and other forms of supply chain risk.
