The Black Swan Imperative And De-risking Supply Chains
by Jack Cheesbrough on October 7th, 2019
Supply chain management is about the management of risk.
The reason so many global manufacturing companies find supply chain risk management difficult is their failure to differentiate between types of risk and the absence of effective Sales and Operation Planning driven by an agile software solution.
With regards to risk typology, it’s crucial to distinguish between events that revolve around a normal probability distribution and those that do not. In his ground-breaking book, the mathematician and economist Nassim Nicholas Taleb defined the former in relation to the Gaussian bell curve and the latter as Black Swan events. In probability theory, the difference between the two types of events is simply their deviation from normative distribution of probability. Taleb writes:
The main point of the Gaussian is that most observations hover around the mediocre, the average. The odds of deviation decline faster and faster (exponentially) as you move away from the average. If you must have one piece of information this is the one: the dramatic increase in the speed of decline in the odds as you move away from the centre, the average.
An example of this “speed of decline” can be seen when calculating the probability of deviations from an average height of 167cm. While the probability of the deviation being 10cm (i.e. someone being 10cm taller than the average) is 1:6.3, these odds increase to 1:780,000,000,000 for someone who is 70cm taller than the average and stands at a height of 237cm.
The effect of this decline is to make planning very difficult when attempting to forecast extreme deviations in probability. According to Taleb, “the rarer the event, the less we know about its odds. It means we know less and less about the possibility of a crisis”. The massive effects of these crises, means it is imperative to take Black Swan events into account when de-risking supply chains. But how do you take highly improbable, unknown events into account?
The answer is not to try and identify every possible Black Swan event (which, by definition is impossible) but to build agility into the management of your supply chain, so that when the event strikes, your supply survives the impact.
There have been attempts to write about Black Swan events in relation to supply chain management. While many of these articles point to an understanding of extreme statistical improbability, not one of them specifies the type of supply chain management software needed to build agility into a supply chain. For example, an article by the VP at Havertys correctly states that Black Swan events “magnify what is wrong in the supply chain and should be seen as such; rather than treated as an anomaly”. However, his solution of “supply chain segmentation and supply chain regionalisation” doesn’t specify how the “tools and technologies” needed to deliver this are to be configured.
In another article, a senior correspondent for cio.com, identifies that “when a black swan happens, companies must quickly determine what products are affected and which customers are using them, along with the financial contribution from each. Plant locations and inventory levels are key. Equipped with that information, companies must decide where to focus their recovery effort”. However, other than to say the solution requires a combination of human and technological input, there is no attempt to identify what an agile software solution capable of managing Black Swan events looks like.
The problem is that it’s easy to talk about extreme deviation from statistical probability but hard to know what to do with the information. We suggest that no solution is possible that is not underpinned and enabled by supply chain management software that delivers the following functionality:
- Statistically sophisticated scenario planning.
- Sales and Operations Planning that can be realigned to sudden shocks to the supply chain within minutes as opposed to days or weeks.
- Delivery of actionable real-world data in a cognitively intuitive format.
If the above functionality is operational, then your supply chain is optimally calibrated to withstand Black Swan events. Crucially, it demands a combination of human and technological solutions. Human problem solving can only work on the basis of the ability of a software platform to distil data at high speed and in an operationally meaningful way. Telab writes that “randomness, in the end is just unknowledge. The world is opaque and appearances fool us”. Above all, in de-risking supply chains, let’s remember how easy we are to fool to avoid fooling ourselves.
For more information about de-risking global supply chains, contact I-Plan at firstname.lastname@example.org or give us a call on +44 (0) 1926 623 225. You may also be interested in this White Paper on Sales and Operations Planning.