Black Swans and Supply Chain Resiliency in 2013

The November 17-18 weekend edition of The Wall Street Journal dedicated its Review section cover to a story titled Learning to Love Volatility, written by Nassim Nicholas Taleb. Several years ago, Taleb put forward the black swan theory, large events that are both unexpected and highly consequential. Superstorm Sandy is an example of such an event that took a toll on individuals, businesses and, of course, the supply chain in 2012. While these events are impossible to forecast, Taleb recommended that we should systematically learn from them so that we may continuously improve our resilience in dealing with future events.

I agree, particularly in the context of supply chain management. Until Superstorm Sandy, 2012 was proving to be a relatively calm year (see my earlier blog on The Calm Before the Storm); nonetheless, as Taleb points out, it seems we are now dealing with a steady stream of year-in-and-year-out black swan events. This is a serious consideration to take into account as we enter 2013.

Supply chains are living organisms that must continuously learn and evolve. Evolution must take us to what we call here at JDA the Self Learning Supply Chain™. This type of supply chain exhibits characteristics promoted by Taleb, including the ability to learn from aberrations and self-heal. As aberrations – both large and small – occur, the supply chain must react. Sometimes the aberrations are so large that they overwhelm the supply chain; for example, infrastructure outages occur that take days and weeks to normalize. As Taleb indicates, we must learn from each of these situations and thereby build the resiliency necessary for lessening their impact in the future. My blog from earlier in the year identifies four key strategies for supply chain managers for 2012. With 2013 in mind, I would now add a fifth strategy, which focuses on learning from key events and systematizing those learnings.

Process Playbooks are Key to Systematizing Black Swan Learnings

In The Wall Street Journal article, Taleb says: “Through some mental bias, people think in hindsight that they ‘sort of’ considered the possibility of such events; this gives them confidence in continuing to formulate predictions.” Thinking you can predict everything is a fool’s game. Forecasting and demand management must adjust to a segmented world; what’s required to survive and thrive in the 21st century is the ability to plan for “known knowns,” react to “known unknowns” and learn from “unknown unknowns.”

These black swan “unknown unknowns” are impossible to plan for, but with each one, it is possible to learn key insights and build muscle memory to better deal with such events in the future. This concept of muscle memory is built into what JDA calls process playbooks. A process playbook is a defined and systematized set of actions to take when events cause supply chain performance to deviate from the plan. As “unknown unknown” events occur, we can learn from them, and catalog those learnings into playbooks, so that supply chain managers can systematically deal with them in the future.

Process playbooks are an integral component of closed-loop supply chain management. I previously discussed process playbooks in a blog about supply chain velocity and defined them in a Supply Chain Quarterly article. My supply chain colleague Steve Banker at ARC Advisory Group, is currently researching how playbooks and similar concepts can be built into the sales and operations planning process to make it more robust.

Supply chain resiliency depends on accumulated learning and codifying that learning into process playbooks. Accumulated learning means the supply chain has a higher threshold for pain: the greater the accumulated learning and the greater the extent to which such learnings have been codified, then the higher the threshold of pain for that supply chain. A supply chain that has a high threshold for pain can react faster and better to unexpected events with far less loss than others with lower thresholds.

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