How buyers can learn not to fear black swans

Charlotte Eaton
posted by Charlotte Eaton
19 February 2015

In a world of increasing over-reliance on certain resources and heightened political and environmental tension, are we affording ourselves, and our businesses, enough protection against unexpected events?

We are all very aware of the 11 September attacks, the 2004 tsunami in the Indian Ocean, the 2008 financial crisis and, most recently, the outbreak of Ebola, and their social impact. But less thought has been given, outside of specialist circles, to the business impact of these, known as ‘black swan’ events. Even within the global business community, their significance is only just being understood.

‘Black swans’ are low-probability, high-impact events that are impossible to forecast. Such events spell disaster for many businesses. You only need to look at the aftermath of the explosion at the Fukushima nuclear power station in 2011. Production of 40 per cent of the world’s embedded microcontrollers for cars was halted as a result, causing delays in the manufacture of 370,000 Toyota vehicles.

One of the consequences of living in an increasingly globalised world is longer and more complex supply chains. While this means we have a wider choice of products at a lower cost, it also signifies greater risk. Experts claim that the average company only knows 7 per cent of what is happening in their supply chains, and this makes industries more vulnerable to black swan events. In addition, these incidents are set to become ever more frequent as we face decreased environmental stability and increased reliance on technology.

It is evident something needs to be done to minimise the risk posed to firms’ supply chains by such occurrences. A recent trend in business has been to try and combat these ‘unknowns’ by using strategic tools to try and predict them and mitigate the risk accordingly. A popular tactic has been that of scenario planning whereby dedicated teams are employed purely to investigate and monitor possible incidents that could impact the business’ supply chain such as natural disasters, and security or political threats. But as black swan events are impossible to predict, this strategy rather misses the point.

A more sensible approach is to work constructively with such events, rather than living in fear of them. Instead of trying to anticipate specific black swan events, we should be building general robustness against any that may occur. Historically, businesses have reacted to adverse incidents and made the relevant operational and strategic changes after they have already happened. A more appropriate way to tackle these occurrences, however, would be to pre-empt the fall-out of such instances by way of defining strategies for business continuity within companies’ supply chains.

Policies such as increasing supply chain transparency so if one supplier is unable to fulfil its obligations, the particular product or service could be sourced from another sub-contractor without disrupting the production line.

It is also useful in certain industries to have effective response teams in place who can quickly and significantly minimise the aftermath of any adverse events that occur.

Simple tactics such as the above could deliver significant benefits to mitigate any potential supply chain risk, but they are also steps that will increase efficiency and streamline operations. Looking at it in this way, black swans can be seen as a business opportunity, and not just a hindrance.

Charlotte Eaton is a consultant at Procuring

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