As the world becomes increasingly complex, the challenges encountered by the logistics and supply chain industry continue to mount. From globalisation and global warming to the COVID-19 pandemic and political instability, any business involved with the transportation, distribution and the storage of goods on an international scale is faced with an ever-growing web of potential hurdles.
And it seems it isn’t enough to plan for things that are likely to happen, many business leaders feel like it’s more important than ever to try to anticipate and plan for the unlikely. In this blog post, we focus on the concept of black swan events, unpack their impact and discuss whether you can safeguard your business against the fallout of these incidents.
What is a black swan event?
A black swan event refers to an unexpected or unpredictable event that has catastrophic and far-reaching consequences. Such happenings are often said to have been predictable in hindsight, despite their high improbability.
The expression is derived from the historical and false belief that all swans are white. The oldest documented reference to a metaphorical black swan comes from second-century poet Juvenal who wrote: “a rare bird in the lands and very much like a black swan”.
Developed by the mathematical researcher and former Wall Street trader Nassim Nicholas Taleb, who wrote a book on the subject in 2007, black swan theory refers to unpredictable, high-profile events that have extreme consequences. Black swans can take any form, from state collapses, to financial crises, to terrorist attacks. In some cases, they have resulted in important scientific discovery, technological breakthrough and artistic achievement.
The trouble with black swans
Many businesses these days are accustomed to analysing past data and using it to predict future events. However, standard forecasting methods cannot predict black swan incidents. Indeed, if firms put too much stock in these methods, it can lead them into a false sense of security and make them complacent when it comes to building robustness against high-impact, low-probability incidents.
Some notable black swans and their effects
Many incidents in recent years could be referred to as black swans. Here we take a look at just a few examples:
The Suez Canal blockage
In March 2021, a huge Japanese container ship, measuring 400 metres long and weighing in at 200,000 tonnes, ended up wedged in the Suez Canal. The extremely busy and important trading route, which sees approximately 12 per cent of international maritime trade passing through it each year, was obstructed for over six days. The blockage sparked a chain reaction of global supply chain disruptions. With ships being forced to re-route, congestion increased at busy ports and distribution centres. It also aggravated the already difficult shipping container shortage. Many types of businesses experienced shipment delays, including dining and drinking establishments, construction firms, health suppliers, wholesale trade and food retailers. This difficult-to-predict event held up an estimated $9.6bn of trade each day. This equated to approximately $6.7m per minute.
The COVID-19 pandemic
Although some people argue that the coronavirus outbreak is not a true black swan due to the fact that experts had previously predicted that a pandemic was inevitable, the majority of businesses couldn’t have predicted the impact this kind of crisis would have on their supply chains, their businesses and the world at large. According to an Ernst & Young LLP (EY US) survey of 200 senior-level supply chain executives in late 2020, only two per cent of respondents said they were fully prepared for the pandemic. Meanwhile, research conducted by McKinsey in July 2020 suggested that 73 per cent of supply chain executives faced problems in their supplier base, and 75 per cent experienced production and distribution. The food and consumer-goods industries were particularly hard hit, with 100 per cent of executives in these sectors saying they had encountered production and distribution problems and 91 per cent revealing they had experienced issues with suppliers. A study commissioned in June 2021 by Interos indicated that pandemic-related disruption cost large companies, on average, $184 million (approximately £134 million) per annum. It also unveiled that 83 per of large businesses have suffered damage to their reputation due to supply chain disruptions.
The 2007-2008 financial crisis
A wide variety of factors led to the global financial crisis that began in 2007, including predatory lending practices, inadequate regulation of the financial services industry, excessive risk-taking on Wall Street and the subprime mortgage collapse in the US. These interconnected events have often been referred to as a ‘perfect storm’. The impact of the economic downturn on the global supply chain was profound, with companies that depended on banks to provide working capital to pay for production, inventory and materials left without liquidity. In the UK, after 63 quarters of expansion, the economy began to shrink. It continued to get smaller for five quarters in a row and took five years to recover to its pre-recession size. It’s thought that the crisis led to the closure of approximately 800,000 businesses in the UK alone.
Protecting your business against black swans
Despite advances in risk management methods and forecasting technologies, it’s clear that we can’t always predict the future. In that case then, how can business leaders in the logistics industry ensure that their firms stand the best chance of weathering the next great storm? The answer lies in building resilience and robustness so that, no matter what the future holds, your chances of survival are healthy.
Here are some of the key areas that logistics businesses should be focusing on in order to become more resilient and robust:
- Reskilling workers for a digital supply chain
According to Ernst & Young LLP, 61 per cent of supply chain executives plan to retrain and reskill their workers in the next year. Businesses should be looking at helping staff to adapt to digital technologies, increased automation and greater levels of virtual collaboration. The health and safety of staff when using equipment should also be a key priority.
- Creating greater supply chain visibility
Businesses need to improve their response to disruption by investing in real-time visibility and monitoring of their supply chain and its constituent parts. More and more, businesses are utilising Internet of Things (IoT) technology and sensors to gather information on the location and condition of goods in the supply chain. This can help a business to move from linear to more integrated and complex supply chains with greater ease.
- Achieving a competitive advantage through sustainability
There’s no doubt that the focus on sustainability is going nowhere. Environmental goals should be taking centre stage for logistics businesses around the globe. Not only will good sustainability performance help to attract investors, employees and customers, this area is also becoming increasingly important in terms of regulation. Furthermore, focusing on a circular, no-waste approach can create significant cost savings.