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Black Swan Events: A Double-Edged Sword for Supply Chain Resiliency Proponents

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Spend Matters welcomes this sponsored guest article from Wayne Caccamo, chief marketing officer at Resilinc.

In 2011, the unthinkable occurred in Japan. A massive earthquake triggered a tsunami, which in turn triggered a nuclear power plant meltdown, all of which combined to create a humanitarian disaster of epic scale. It is during times like these that many companies rethink their supply chain vulnerabilities and threat matrices. The result is an upswing in interest in supply risk management and resiliency strategies and initiatives and associated technology solutions.

But what happens if your impact assessment analysts report that this major disaster resulted in only one factory being shuttered for one week? While the reaction should be a feeling of great fortune that more suppliers weren’t in the impacted region, the conclusion that many walk away with is, “Hey, one of the worst scenarios that one can imagine happened and we bounced back quickly. Why should we worry about investing more in a risk management capability?” In other words, leadership can confuse luck with resilience and the black swan event actually results in increased complacency and not increased concern — the opposite of what we might assume.

More recently, a major earthquake struck Japan in a region dense with suppliers to the auto and electronics industries. This time imagine that the very same global manufacturing giant that experienced single one-week factory shutdown experienced four or five assembly plant shut downs for two weeks each. As a result, losses are now being measured in the hundreds of millions of dollars.

What can we conclude from this sequence of events?

First, too much emphasis is initially placed on the event itself and not the impact. A black swan event is in the eye of the beholder. One company’s black swan is another company’s speed bump and vice versa. Resiliency is about building a broad capability that can simultaneously address the everyday operational disruptions, as well as the relatively rare black swan events.

Second, this broad capability makes organizations resilient to all types of disruption events, not just those triggered by earthquakes. At the end of the day, if factory lines go down, it doesn’t matter if it was caused by an earthquake, a factory fire or a labor strike. The relevant risk treatment strategies and options are the same (e.g. find an alternate source, improve supplier visibility, invest in monitoring and alert services for early detection, increase inventory strategic buffer, enforce higher business continuity and recovery standards, design products and supply chain networks for resiliency). A resiliency strategy ensures that the risks associated with the most critical supplier sites — based on financial value-at-risk of potentially affected products and components — have been proactively identified and mitigated.

Third, the impetus for spinning up a supply chain resiliency initiative or accelerating existing program investments should not be the most recent headline-grabbing black swan event. It’s not a question of if you will experience another severe impact event, it’s a question of when. The best supply chain risk management companies not only prepare to respond quickly to significant events and crises after they happen, they proactively mitigate risks so that the crisis management “playbooks” need only be activated during true black swan events.

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