Rethinking Black Swan Events for Modern Supply Chain Risk Management

Black swan supply chain events have traditionally been associated with (if not formally defined as) improbable, rare, or unlikely events with severe or even catastrophic business impacts. However, as we learn more about how disruptions impact supply chains, it is time for companies and supply chain managers to reconsider the traditional view of black swan events.

In this blog, we will explore a new way of looking at black swan events for modern supply chain risk management, drawing teachings from the book The Power of Resilience by Yossi Sheffi.

What are Black Swan Events in Risk Management?

Before we begin to rethink black swan events, it’s essential to understand the traditional definition. There are two components that make up a black swan event. First, these events are high-impact and unpredictable.

The COVID-19 pandemic is a prime example; it was unexpected and impacted nearly every industry, level of supply chain, and facet of life. Other frequently cited examples of black swan events include the advent of the internet, the September 11 attacks, and World War 1. However, black swan events can also be caused by other supply chain disruptions, for example, extreme weather and cyber security attacks.

The second component of black swan events is that, while they are unpredictable when they happen, they seem predictable in hindsight due to the surrounding circumstances. Let’s examine why this is true.

Black Swan Events are Predictable in Retrospect

Black swan events are improbable but increasingly less rare. How can both be true at the same time? To understand, we must distinguish between two perspectives. First, we must look at the circumstances associated with a singular event, for example, a category-five hurricane like Hurricane Maria. Then, we must look at the probability that this event will happen again over time; for example, category-five hurricanes occur an average of once every two to three years. With this context, category-five hurricanes aren’t as rare or unexpected as they may initially seem.

Here’s another example. Imagine a turkey that is well-fed and has lived a comfortable life. If the Turkey is slaughtered for Thanksgiving—that would be considered a black swan event for that turkey. However, for the butcher (and most people), this is a reoccurring event that we know happens annually to many turkeys.

Thus, after evaluating the context of a disruptive event, it’s possible to see that black swan events are bound to happen—and destined to repeat themselves. Even though some parameters may differ (such as the event’s time, location, or specific type), it is likely that similar incidents have already happened in the past and will continue to occur in the future.

How are Black Swan Events Changing Over Time?

Now that we’ve established the traditional definition of black swan events, let’s explore how black swan events are changing over time, particularly in terms of their increasing impact and frequency.

#1  They are getting bigger

Yossi Sheffi, author of the book The Power of Resilience, guarantees that future disruptions will be more significant than anything we have witnessed. Why? Because the past is bound, and the future is unbounded and limitless. Additionally, as supply chains become more intricate and interconnected, the impact of disruptions is increasingly felt on a global scale. Globalization means that the impact of events is less localized and, therefore, more impactful.

Supply Chain Risk Management Lesson: While these events will continue to grow, Sheffi advises that they should be addressed with the same approach as other supply chain disruptions and risks. According to Sheffi, companies must develop a general capability and process to proactively identify, quantify, and prioritize risk scenarios for mitigation and strategies for early detection and rapid crisis response. After all, everyday minor supply disruptions and delays can have a greater impact on business than less frequent but more severe black swan events.

#2 They are increasing in frequency

As we mentioned, globalization means the impact of an event is less localized and, therefore, more impactful. As supply chains become more complex, this also increases the frequency of black swan events—because there’s more room for error. Furthermore, a key driver for extreme weather-driven black swan supply chain events is climate change–a socio-economic challenge that will not be reversed anytime soon. Moreover, technology and the hyper-connectedness of suppliers, brands, and OEMs make cyber disasters more likely. Finally, escalating geopolitical unrest can be one element of a perfect storm resulting in a black swan event.

Supply Chain Risk Management Lesson: Don’t be preoccupied with the rarity, the unprecedented, or the unimaginable nature of black swan events. This leads to a defeatist and illogical conclusion that supply chain risk management is futile. Focus on reducing the business impact regardless of event timing, severity, type, location, etc., with proactive strategies prioritized by value-at-risk.

An Event Can Achieve ‘Black Swan’ Status Based on the Response

It’s worth noting that sometimes events can be labeled as “Black Swan Events” even though they technically are not. For example, Hurricane Katrina (2005) would be considered a black swan event. Not because disasters of that magnitude were unprecedented, unimaginable, or unforeseen, but, rather, because of the response.

Everyone knew that the city of New Orleans is at the base of a geographic soup bowl, whose brim, once breached, could lead to epic flooding—Hurricane Andrew raised that concern back in 1992. However, most could not imagine an extreme weather event could wreak that much havoc in the U.S. and how poor the disaster preparation and federal crisis response could be.

Supply Chain Risk Management Lesson: Planning and response preparedness can avert a potential black swan event before it goes down in history as such. The general answer is to build a resilient enterprise that anticipates, prepares for, and responds rapidly to all types of events, ranging from the severe to everyday supplier disruptions and delays.

Start Building a More Resilient Supply Chain 

So, how should companies and supply chain risk managers change how they think about black swan events? There are three key takeaways:

1. Companies must develop a process for risk reduction, early detection, and rapid crisis response.
2. Black swan events should be thought of like regular supply chain disruptions. Focus on mitigating the impact regardless of the timing, severity, and location.
3. Planning and response preparation can stop an event from becoming a black swan event.

Companies must first map the supply chain down multiple tiers to prepare for black swan events. 85% of disruptions originate deep within the indirect supply chain (think sub-contractors, component suppliers, and mines). When these tiers are unknown, it increases the chances of a regular disruption becoming a significant event. With Resilinc’s Multi-Tier Mapping solution, businesses can harness the power of sub-tier visibility to collaborate within hours of a disruption.

Next, after the supply chain is mapped, companies must monitor the supply chain. Resilinc’s EventWatch^AI is the most comprehensive monitoring system, scanning over 104 million sources and sites for worldwide potential disruptions. Using EventWatch^AI, companies can detect threats before they become an issue.

Black swan events are becoming more frequent and impactful, making supply chain risk management more important than ever. Start building a more resilient supply chain today to protect your company from the disruptions of the future. Request a demo to learn how Resilinc can elevate your supply chain risk and resiliency program.