Black Swan Alert: Low Tech Links Devastate High Tech Supply Chains

Find your supply chain best practices checklist. Just-in-time processes? Check.  Optimum sourcing strategies? Check. Lean logistics? Check. Best-in-class technologies? Check.  Black swan avoidance? Uh-oh.

Find your supply chain best practices checklist. Just-in-time processes? Check.  Optimum sourcing strategies? Check. Lean logistics? Check. Best-in-class technologies? Check.  Black swan avoidance? Uh-oh.

Bangkok, Thailand is under water.  In perhaps the world’s worst flooding to devastate such a large city in modern times, Bangkok is home to ten million citizens and has an additional ten million people outside city limits.  The Chao Praya river drives down the middle of Bangkok and is supported by dikes and drainage canals for rainy seasons. But this month, the river is eight feet above normal, and while dikes have not failed, flooding has caused most residents to leave the city.

The human tragedy of such a flood aside, what’s occurring in Thailand is on just about every global CEO’s radar screen. And that’s because Bangkok is a crucial link in many high tech supply chains.

David Pilling of the Financial Times notes that companies such as Mazda, Toyota and Toshiba all have suppliers and factories in Thailand. And Honda’s Thai assembly plant, which traditionally manufactures 250,000 cars a year, has been shut down for three weeks.   With such interconnected and complex supply chains, sometimes spanning many countries, Pilling says these links are “prone to strain, particularly when paired with the just-in-time practices pioneered by Japan.”

Many supply chain gurus push companies to optimize inventory practices, adopt just-in-time strategies, and reduce redundancy wherever possible. And in “normal times” this approach makes sense. However, when disaster strikes, manufacturers are discovering their thin margins for error are in fact, leaner than they should be.

Nassim Taleb, author of The Black Swan, and professor of Risk Engineering at New York University is no stranger to interlocking fragility. He says most business professionals assume we live in a world of mild randomness, where events don’t stray far from the mean. Taleb argues the opposite, that in fact, because of tightly coupled financial and consumer markets (much less recurring natural disasters) we live in periods of wild randomness where small probability events carry large impacts (i.e. Black Swans).  These extreme events—Thai flooding or Fukushima disaster, for example, are shutting down entire supply chains for weeks and even months, causing hundreds of millions in lost profit opportunities.

A solution proposed by Dr. Taleb and others is to build a robust system (in this case supply chain) with redundancies and disaster recovery processes to properly manage extreme event risk. And while some experts argue redundancy adds costs to already paper thin margins, there are surely costs to not supplying markets with needed product because an unforeseen event has silenced your supply chain.

Bob Lutz, former vice chairman of General Motors says it best; “Running your procurement purely on a short term, point in time, cost minimization model is like shopping for rock bottom home insurance. It looks real smart until your house burns down.”  He goes on to say; “What happens when ‘just in time’ is ‘just plain late’”?

Good question and one which many global CEOs are still struggling to answer.