Planning for Black Swan Events in a Global Supply Chain
You don’t think they will happen – you pray they won’t – but terrible events sometimes do occur. A global pandemic with a high mortality rate. A devastating natural disaster that kills thousands or even tens of thousands. A terrorist attack. A civil war. Once the awful news has been digested, companies need to move to Plan B, and having transparency in supply chain management is essential.
The first assumption about your Plan B is that you have one. Indeed, some will have this knee-jerk response: “Why bother? What can one company do in the face of an event that will take not only a government but possibly many governments to contain and mitigate?” But companies must push beyond this attitude because – and pardon the cliché – life does eventually go on. When the worst is over, you must be ready to forge ahead for the sake of employees, customers and shareholders.
A Step-By-Step That Misses a Key Element
To help companies get their arms around the enormity of planning for such events, Forbes.com’s Bill Conerly did an excellent job distilling one approach from the book Million Dollar Blinds Spots: 20/20 Vision for Financial Growth. He prescribes the following steps to prepare for the unthinkable:
1. Identify risk events
2. Assess the probability of each event
3. Make a cost-benefit analysis of response alternatives
4. Choose a response
5. Re-assess probability and impact with company response
6. Ongoing monitoring of risk events
Good list. However, a key element has been left out that should be No. 1: Know your supply chain.
This is easier said than done because supply chain management, especially for global supply chains, can be unbelievably complex and opaque. One automobile line, for instance, could be supported by 5,000 suppliers. For companies with numerous product lines – and accompanying supply bases – tracking beyond the tier two level of supplier seems too difficult.
Yet one just has to look to the plight of several auto manufacturers after Japan’s earthquake in 2011. The carmakers were reliant on a $1.50 piston-engine part manufactured by a tier three supplier in Japan and were blindsided when the part became scarce. Because it was a commodity part, most didn’t view it as important enough to track.
Another Consideration: Do You Have Redundancy?
Then consider this: When a disaster unfolds, gathering such information is all but impossible for manufacturers located halfway around the world. After floods covered much of Thailand in 2011, the semiconductor and electronics industries were caught flat-footed. In some cases, companies such as Intel found themselves unable to get answers about production for weeks. Intel wound up missing its fourth-quarter results because the global shortage of hard disk drives.
That brings us to item No. 8 on a company’s disaster checklist (or rather, what, in my opinion, should be No. 2:) Build redundancy into your supply chain. Do you have secondary suppliers already identified and loaded into your system? Do you have a plan to restart operations elsewhere quickly?
One doesn’t need to be a geologist to know that planet earth is unstable; nor does one have to be a sociologist to know that humankind is prone to fighting and violence. Somewhere at some point a supply chain will be disrupted for whatever reason. The company’s job is to lean on supply chain management solutions and restart production as soon as possible no matter how overwhelming the destruction appears to be.