Supply Risk Lessons From BP

I was telling my wife the other night over a date-night dinner that if I had more time on my hands, I could spend 12 hours a day right now digging into a supply risk analysis of BP's oil spill, especially considering Transocean and Halliburton's involvement, among other suppliers, in contributing (or not) to the rig's failure. But the broader industry risk analysis question posed by oil industry expert Matt Simmons in a CNN interview is whether or not we should step back entirely from deep water drilling efforts or not. On this subject, Simmons says that one of the lessons from the disaster is that "We have to continue drilling in shallow water, but we probably need to take a deep breath and step back. Until we develop a new generation of equipment that can respond to these accidents, just don't go into the ultra-deep water and deep formations because it's just too risky."

The philosophical supply risk question to ask here is: to what degree, when we become overly reliant on our partners for key supply chain and operational activities, do we lose the ability to step in and react quickly when a crisis hits? It's my guess that if BP had been more actively involved in both the engineering, building and operation of the rig, they would have been able to more quickly put in place previously planned contingencies and efforts to curtail the disaster in the early weeks after it happened. But instead, given the loose network of suppliers involved -- resulting in distributed knowledge and intelligence -- the spill continued to flow out of control.

This question is one that goes well beyond BP -- and the oil and gas industry for that matter. As we involve suppliers more in all phases of complex engineering feats and engagements, we lose control and not only increase the potential for supply disruptions (e.g., Boeing's 787 issues), but also our ability to respond to catastrophic failures and disasters as they occur. Sometimes I think we're just starting to understand the risk pickle we may be in given how extended supplier relationships govern so much of what we engage in today as professionals and corporations. Given this, even though Marsh and Aon have begun to underwrite supply risk products for companies right now, I'm not so sure I'd want to be a counterparty to a transaction where it's not clear exactly what all the potential risks (Black Swan and otherwise) involved could be -- let alone the buying organization's ability to step in and take back control once a major supply risk incident surfaces.

Jason Busch

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