The lecture discusses modern supply chain risk management, highlighting misconceptions and the importance of adapting to 'unknown unknowns' and 'black swan' events. It emphasizes that traditional linear assumptions in forecasting can lead to disastrous consequences, particularly in a globally interconnected market. Solutions proposed include near-shoring, increased redundancy, and proactive disaster planning to mitigate potential risks.

1. MBA Lecture:
A BETTER APPROACH to
Supply Chain Risk
Management
Paul Barsch
Marketing Director

2. Modern Day SCM Assumptions
• Signal based
JIT… is good • Inventory is waste
• Right inventory, right place,
right time

3. Modern Day SCM Assumptions
• Cost reduction via elimination
Lean … is good of waste (non-value adding
work)
• Improve the flow (smoothness)

4. Modern Day SCM Assumptions
• Statistical forecasting using
Forecasts … are historical data
mostly accurate • Usually simple linear
regression
• Collaborative

5. Problems with Predictions
What’s This?

6. Problems with Predictions
“In all my experience I have never
been in any accident of any sort
worth speaking about. I have seen
but one vessel in distress in all my
years at sea…I never saw a wreck
and have never been wrecked, nor
was I ever in any predicament that
threatened to end in disaster of any
sort.
-Edward John Smith- Captain, Titanic

7. Problems with Predictions
"I think there is a world
market for maybe five
computers."
- Thomas Watson, chairman of IBM, 1943

8. Problems with Predictions
• “We’ve never had a decline in
house prices on a nationwide
basis. So, what I think what is
more likely is that house
prices will slow, maybe
stabilize, might slow
consumption spending a bit. I
don’t think it’s gonna drive the
economy too far from its full
employment path, though.”
-7/05

9. More Problems with Predictions
• In the early 1990s, JK
Rowling’s Harry Potter and
the Philosopher’s Stone was
rejected by 12 UK publishers.
• “Not unique enough to stand
out in the marketplace” –
recording studios to Madonna
in early 1980s

10. So much for Conventional Thinking…

11. Assumption 1: Normal Distribution
– “Known Knowns”
• Assumes
normality
• Independence
(i.e. coin flips)
• Randomness
• Unlikely events
are rare; many
standard
deviations from
mean
66-95-99.7

12. Assumption #2-
Bayes for “Unknown Knowns”
• Bayes is subjective probability – a
measure of belief.
• Not precise, not objective. We can
learn from approximations
• Allows making of predications with
no prior information at all
• Infer where objects are based on
learned experience; each new bit of
information gets you closer to
certitude, keep revising probabilities
• Compute power helps
• The hunt for U-Boats and Soviet
Subs!

13. Assumption 3: Fat Tails – the “Unknown,
Unknowns”
• Non “normal”
distribution
• Outliers
• Black Swans:
1 in 100 year
events now
happening
every 2-3 yrs
• “We need to
start thinking
about the
inconceivable”
– N.Taleb

14. Belief vs. Reality
What we assume
What happens very
infrequently – but with large
impact!

15. Beware Mickey Mouse Probabilities
• Before the -23% drop in the 1987
crash, the worst previous in
sample move was close to 10%
• “Not in a million years would we
have expected this gyration to be
as vicious and enduring as it has
been,”
– Steven Solmonson, head of Park Place Capital
Ltd.
• “A turkey cannot figure out what
is in store for it tomorrow based
on the events of today.”
– Nassim Nicholas Taleb

16. Fat Tails Happen!
• Watch the PBS Frontline video on
Fukushima Daiichi nuclear disaster
• http://video.pbs.org/video/2202847024/
(start at 1:25 til 8:25)

17. Who Needs a Microcontroller Anyway?
• 40% of world’s embedded microcontrollers (for cars)
made at factory disrupted by Fukushima
• Controls engine
• Sensing systems for
airbags
• Dashboard display
systems
• GPS Navigation
• Collision warning
• Advanced features such
as self parking systems,
internet access
Production of 370,000 cars delayed at Toyota

18. Drastic Changes in Past 20 Years
• Dot.com/Y2K
• World is Flat Phenomenon
• New Characteristics:
– Technology Advances
– Speed and Zero Latency
– Interconnectivity
– Fewer buffers
– Consolidated players
• Now we live in a system – fewer
islands
• Is the World More dangerous?

19. Are We Sitting on Dynamite?
• “Globalization creates interlocking fragility,
while reducing volatility and giving the appearance
of stability. In other words it creates devastating
Black Swans”.
• “Almost all banks are interrelated. The
increased concentration among banks seems to
have the effect of making financial crisis less
likely, but when they happen they are more global
in scale and hit us very hard.”
• “(The Great Moderation). True, we now have
fewer failures, but when they occur .... I shiver at
the thought. The government-sponsored institution
Fannie Mae, when I look at its risks, seems to be
sitting on a barrel of dynamite, vulnerable to the
slightest hiccup”. -Nassim Taleb, 2007

20. Implications
• Humans mostly think
linearly – tomorrow will be
like today
• World was loosely coupled
and less complex (oceans
as buffers)
• Things that were once
loosely coupled; now tightly
correlated because of
network effects and
derivatives
• Connectedness = Domino
Effect, especially when
there are errors

21. Solutions
• Near shoring – bringing work
back home
• Examine risks up and down
supply chain
– Beyond Tier 1 suppliers
• Redundancy
• Disaster Planning for “known
knowns” and “unknown
knowns”
• Doing Nothing
– “It is difficult to motivate people in the
prevention of Black Swans...
Prevention is not easily perceived,
measured, or rewarded; it is
generally a silent and thankless
activity. History books do not account
for heroic preventive measures” –
Taleb (2005)

22. Food for Thought
• Remember – things that haven’t happened before will happen.
Things that have happened, will happen again.
• Your “worst case scenario” probably isn’t really the “worst case
scenario” (think: Fukushima’s seawall).
• With knowledge that things are fragile– better to be a little wrong
(limited loss) than majorly wrong (out of business)
• Don’t think of Black Swan’s as only negative (what I can avoid)
– Think of them as “options”. Little investments with limited loss. Many
have more upside than downside
– Trial and error are options with small costs. There are huge pay-offs for
being right such as big discoveries (positive Black Swan).