Transcript of "Black swan events imhx 2013 4 [read only]"
Presentation to IMHX:
What is the right approach to Black
A presentation by Transport Intelligence to IMHX, Birmingham
John Manners‐Bell, CEO
21st March 2013
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1. About Ti
• Against the backdrop of a world beset by natural catastrophes,
are corporations taking the right approach to ‘Black Swan’
• What strategies should companies take to avoid the huge
disruptions felt globally by such sectors as the automotive and
electronics industries following the Japanese Tsunami?
Theme of presentation
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
• 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
• 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
• Likewise management’s predictions are
similarly based on straight line
projections or normal distribution
patterns – and can result in the same
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
• 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
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
Black Swan Events in Supply Chains
Modern supply chains have the following attributes:
• Lean inventory
• 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.”
Evolution of risk
Over the years, internal risks have fallen as supply chain strategies have
developed JIT, Lean Inventory, Quick Response etc
However external risks from disruption – whether natural disaster,
terrorism, economic shocks etc have increased.
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
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
Sectors most at risk
The high tech sector – being most globalised and with largely out‐
sourced production – is the most exposed to external shocks
Lack of supply chain visibility
Ford, once famous for offering ‘any colour you like, as long as it’s black’
could no longer deliver its ‘tuxedo black’ cars as the pigment was
produced only by a single producer; which was based near the
Fukushima nuclear plant
Unknown to each other – Chrysler, GM and a number of German car
companies also used the pigment in their paints; but as they sourced
their paints from different suppliers none were aware that they relied
on this sole producer.
Manufacturers should share more information and ‘go for
transparency’ to ensure that a single third or fourth tier of supplier’s
failure could not have such a big impact on their supply chain.
• 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
• 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
• 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
How resilient are modern supply chains?
A small supply chain with a single production facility is highly vulnerable to external
events whereas a large, complex supply chain with multiple supplier options has the
potential to be much more robust through a greater number of sourcing options.
Each option may have higher supply chain risk attached although – and this is the key
point – the probability of overall network disruption is less than in a small supply
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.
• 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
• Addressing vulnerability is the best way to mitigate the impact of a
• Future supply chains will be about ‘resilience’ – not just ‘lean’
Mitigating supply chain risk
Manufacturers usually adopt one of three strategies when dealing with
• 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.
• 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?
How does Cisco manage risk?
Supply chain resilience has become a core business challenge across the
enterprise, not just a logistics problem.
Cisco’s timeline response to the tsunami
Within 30 minutes of the initial alert of the earthquake, the supply chain
incident manager was made aware of the event, alerted both the SCRM
team lead, team members and the Supply Chain Operations senior
Within 12 hours, the primary supply chain incident management team was
activated. This team consists of an extended group of operations functional
leaders that represent their functional organizations during an incident.
Utilizing Business Continuity data and processes, all direct suppliers, their
associated sites and components and other critical supply chain nodes in
the impacted area were identified within 12 hours of the initial earthquake.
Cisco established a Supply Chain Incident Management Team War Room
within 2 days of the initial earthquake to provide a central management
point and decision making forum for all Supply Chain Operations personnel
involved in the mitigation effort.
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
• 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.
Business Continuity – speed and data
Cisco managers were also able to profile each supplier site from various
• 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.
Cisco’s War Room
Cisco’s Supply Chain Incident Management Team War Room approach,
structure and operations were based on the SCRM Incident Management
These playbooks create a predefined reference for bringing together the
Customer Value Chain Management (CVCM) organizational leaders to assess,
mitigate and resolve a disruptive supply chain incident.
The playbooks define a functional track structure, key contacts related to
various types of incidents, templates and other collateral to assist in running
and managing an incident response.
Cisco’s response to the tsunami
Bottom Line: In a very short period, the crisis management system was able
to assess more than 300 Tier 1–Tier 5 suppliers — including site inspections
and more than 7,000 part numbers — and complete a risk rating and
According to management, the largest supply chain disruption in modern
times created virtually no revenue impact for the company.
Key to Cisco’s response was being able to identify the lack of visibility into
sub‐tier supply chain (suppliers that supply Tier 1 component
Having this as a “known unknown” was critical to quickly resourcing a team
to investigate key impacts and ramifications in this area and to mitigate
• "Seagate owes its return to market leadership to a
fortuitous accident in geography: Its HDD
manufacturing plant in Thailand is located on high
ground," says IHS iSuppli.
Final remark ‐ Reducing the element of luck
• For more information on the subject of supply
chain risk, contact John Manners‐Bell on
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