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The rise of black swan events in supply chains

Black Swan Event

Matthew King, Senior Manager at State of Flux, explores black swan events in supply chains, mitigating these events through supplier relationship management and building resilient supply chains.

In recent years, the global supply chain landscape has witnessed an increasing occurrence of what Nassim Nicholas Taleb, in his seminal work ‘The Black Swan: The Impact of the Highly Improbable’ defines as Black Swan events. 

These events, characterised by their rarity, extreme impact and retrospective predictability, have thrust the world of logistics and supply chain management into a realm of unprecedented challenges and complexities.

The essence of black swans in supply chains

A Black Swan event in the context of supply chains can be anything from a sudden, unexpected global pandemic, drastic climate events to geopolitical tensions leading to trade wars or sanctions. 

Taleb’s concept illuminates the fragile nature of our interconnected global economy, where such unpredictable events can have cascading effects across the world. 

The COVID-19 pandemic, for instance, served as a quintessential Black Swan, upending supply chains overnight, exposing vulnerabilities and forcing industries to reckon with the limitations of their forecasting models.

Similarly, the Suez Canal blockage in March 2021, though shorter-lived, disrupted global trade flows, illustrating how a single event in one part of the world can send ripples through the global economic fabric. 

These examples underscore Taleb’s argument about the profound impact of highly improbable events and the fallacy of relying solely on historical data for future predictions.

A Black Swan event is characterised by three principal attributes, which distinguish Black Swan events from regular occurrences and help in understanding their nature and impact:

  • Rarity: A Black Swan event is extremely rare and lies outside the realm of regular expectations because nothing in the past can convincingly point to its possibility. This rarity makes the event unexpected and unpredictable using standard forecasting methods and models
  • Extreme Impact: When a Black Swan event occurs, it has a profound effect. The impact is significant, often altering the course of businesses, economies or even entire societies. The consequences are far-reaching, affecting a wide range of sectors and geographies
  • Retrospective Predictability: Despite being unpredictable beforehand, humans have a tendency to concoct explanations for the occurrence of Black Swan events after the fact, making them seem more predictable and understandable than they really are. This hindsight bias leads people to believe that the events could have been expected and mitigated against, which is seldom the case

Black Swan events can be positive or negative, although they are more frequently discussed in the context of negative impacts due to their disruptive nature. 

Examples include unexpected technological breakthroughs on the positive side and financial crashes, natural disasters or pandemics on the negative side. 

Understanding the nature of Black Swan events can help individuals and organisations develop strategies to increase resilience and flexibility, rather than attempting to predict the unpredictable.

Mitigating black swan events through supplier relationship management

Given the unpredictability of Black Swan events, traditional risk management strategies often fall short.  At State of Flux, we believe that developing robust relationships with suppliers is crucial for navigating the murky waters of supply chain disruptions. 

Often the path for solving a supply chain disruption is to leverage the supplier relationship to get them to ‘help you out’ when a disruption occurs. The challenge is when these are happening on a regular basis or other customers take precedence for the supplier’s scarce time, resources and efforts. 

Our research and work in supplier relationship management (SRM) emphasise the significance of becoming a ‘customer of choice’ for suppliers. It cannot be ignored that 79 percent of organisations enjoy better risk mitigation when they are a customer of choice.

Being a customer of choice means fostering mutual trust, open communication and collaboration with suppliers.

This relationship dynamic not only ensures preferential treatment in times of scarcity but also facilitates a more transparent exchange of information, allowing for quicker response times and adaptability in the face of unforeseen challenges. 

Our findings highlight how organisations with strong SRM practices are better positioned to anticipate disruptions, secure alternative sources of supply quickly and maintain operational continuity during Black Swan events. 

To build strong and lasting relationships with your suppliers, you can take the first step by benchmarking your supplier management against over 300 organisations that participated in our research.

Looking ahead: building resilient supply chains

The increasing prevalence of Black Swan events in the global supply chain necessitates a shift from reactive to proactive strategies. 

While predicting these events remains a challenge, the focus must be on building resilience and flexibility into supply chain operations. This involves implementing formal supplier management programs, investing in digital transformation for visibility across suppliers and the supply chain, and cultivating strong supplier relationships.

In line with Taleb’s advice, preparing for the unpredictable by minimising vulnerability to negative events—and potentially leveraging positive ones—can transform how organisations approach supply chain management. 

As we move forward, the lessons learned from past Black Swan events and the insights from our team at State of Flux will be invaluable in guiding this transformation.

The journey towards a more resilient supply chain is complex and fraught with challenges. However, by embracing the uncertainty and focusing on strategic supplier relationship management, businesses can navigate the unpredictable seas of global commerce more effectively, turning potential threats into opportunities for growth and innovation.

To build strong and lasting relationships with your suppliers, benchmark your supplier management against over 300 organisations and take the first step by attending one of our industry-leading training courses.

The SRM Advanced training course will equip you and your team with the skills you need to build lasting relationships with your suppliers that will make your organisation their customer of choice.

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