Black swan events imhx 2013 4 [read only]
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A presentation I made on supply chain risk and how to make your supply chain more resilient. Includes a case study of Cisco.
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Black swan events imhx 2013 4 [read only]
- 2. • Established in 2002 to fill a gap in the market for high quality, cost effective market research • Ti has now become the leading provider of market research solutions to the global logistics industry • Advisors to World Economic Forum, World Bank, UN and European Commission • Global research centre based in UK; research offices in Atlanta, USA and Hong Kong • Key Pillars: Research reports, Consulting, Knowledge Portal, M&A, Conferences/Training • Ti’s Global Associate Network provides a multi‐country, multi‐ disciplinary and multi‐lingual extension to Ti’s capabilities 1. About Ti
- 4. What is a ‘Black Swan’ event? • A ‘Black Swan’ is an event which cannot be foreseen, but when it occurs changes the whole understanding of the market. • The theory is outlined in Nicholas Taleb’s book ‘The Black Swan’ published in 2010. • It is so‐called as, prior to discovering black swans in Australia, Europeans believed that all swans were white. • In fact, a lack of knowledge and experience showed that their understanding of nature was fundamentally mistaken. • ‘All observed swans are white – hence all swans are white’ • By assuming some event is ‘impossible’, people and companies become complacent and this leads to lack of preparedness.
- 5. • However, on this day a ‘Black Swan’ event occurs for the turkey! • They are let down by a lack of knowledge and the assumption that the state of affairs will continue for the foreseeable future. • Likewise management’s predictions are similarly based on straight line projections or normal distribution patterns – and can result in the same outcome. Black Swans and ‘Turkeys’ • Taleb says that corporate managers and turkeys have a lot in common! • Turkeys are fed for 300 days in the run up to Christmas • On a straight line regression analysis, turkeys will expect to be fed on Day 301
- 6. • Intertwined networks – energy, transport, financial, ICT and human – mean that the consequences of failure in one can be critical and unforeseen. • Central London bombings were an example – this had implications for bus, tube, cellphone, IT networks which spread and brought down the transport network across the South East of England. Black Swans and the modern world • Most business professionals assume we live in a world of mild randomness, where events don’t stray far from the mean. • However Taleb argues that, because of tightly integrated markets, we live in periods of wild randomness where small probability events carry major consequences.
- 7. Black Swan Events in Supply Chains Modern supply chains have the following attributes: • Lean inventory • Centralised • Just in time • Remote production • Use of developing countries • Multiple tiers of suppliers They are designed to keep labour and inventory costs to a minimum, but also create SYSTEMIC VULNERABILITY 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.”
- 9. Internal versus external risk Supply Chain Characteristic Internal Risk External Risk High Stock Levels High Low Lean Supply Chains Low High ‘Bundled’ in‐house production High Low ‘Unbundled’ out‐sourced production Low High Globalised sourcing Low High When people talk about supply chain risk, they usually mean ‘external’ threats. However the relation between external and internal risk is very close. For example, increasing inventory levels increases ‘internal’ risks (redundancy, wastage, financing etc) but mitigates external risks (the impact of a disruptive event on supply).
- 13. • Ash cloud shut down much of European air space • Cost to European economy ‐ £1.9bn • Cost European airline industry $200m per day • Inadequate response by administrators and freight operators – lack of contingency planning Event 1: Icelandic volcano 2010
- 14. • Direct cost £133bn in Japan alone • Cost to global supply chains much greater • Japanese electronics sector hardest hit, with many consequences for the automotive sector. • Chemicals also affected • Honda’s and Toyota's plants in the UK shut down production due to interruptions to component supply Event 2: Japanese Tsunami 2011
- 15. • Thai Floods – 2011 • 10,000 factories were forced to close • Automotive and high tech (especially hard disk drive production) again hardest hit • Dell and Intel profits hit • Total cost $15‐20bn Event 3: Thai Floods
- 17. Point of disruption • One other interesting factor which impacts significantly on the extent of disruption is the location of the event within the supply chain. • The further upstream it occurs, the longer the disruption to supply. • The reason for this is that down‐stream processing locations act as bottlenecks and take time to fulfil back‐orders once up‐stream supply is switched back on.
- 18. ‘Unknown unknowns’ • Just because ‘Black Swan’ events cannot be predicted, does not mean that you cannot prepare. • Rather than look at past events in order to gain some insight into the future, the best defence is to identify weaknesses in your supply chains instead. • Addressing vulnerability is the best way to mitigate the impact of a disruption. • Future supply chains will be about ‘resilience’ – not just ‘lean’
- 19. Mitigating supply chain risk Manufacturers usually adopt one of three strategies when dealing with risk: • Inventory management – build up buffer stock • Sourcing – developing contingency strategies for specific suppliers or supply chain links • ‘Acceptance’ – doing nothing as costs of mitigation outweigh benefits of lean supply chain strategy Deciding on which strategy to adopt relies on understanding the cost implications of each approach.
- 20. • The development of information technologies will play an important role in the mitigation of supply chain threats. There is little prospect that these risks will diminish – some may even increase. Therefore the ability to react to events will become the key competitive differentiator, and technologies which enable an enhanced level of supply chain agility will become highly sought after. • However the adoption of more technology will also play a role in increasing risks. Increasing reliance on technology will leave supply chains open to ‘cyber attacks’ or even accidental outages. Whilst technology will lead to greater levels of efficiency, it will also mean that maintaining robust networks will be ever more critical. Technology – friend or foe?
- 23. Cisco’s response to the tsunami In the first few days following the incident Cisco’s incident management team was able to: • Establish contact with suppliers to assess the impact of the incident on site capacity • Develop a prognosis of their ability to continue to produce • Identify their ability to distribute components. The incident management team was then able to develop a snapshot of the supplier impact and status over the entire region. This snapshot was refreshed on a daily basis based on the evolution of the crisis circumstances (e.g. addition of the nuclear exclusion zone around the Fukushima nuclear facility, changing electrical power capacity projections, etc.) and facilitated faster, more informed executive decision making on mitigation activities and prioritization.
- 24. Business Continuity – speed and data Cisco managers were also able to profile each supplier site from various resiliency perspectives. These included: • the expected time‐to‐recover (TTR) for the site, • back‐up power generation capabilities and • whether the supplier’s components were single sourced or had alternate sites available.