Supply Chain Black Swans

If anything should have been learned from the Financial Meltdown of 2007-2009,it is a childhood lesson that your Mom repeated count less times –  playing with fire and other things techie you don’t completely understand…. oops make that derivatives and other complex seccurities while under the influence of extremely high leverage can be  very detrimental to your financial survival even in the  protective custody of the family. That is to say even with undying help from  Biggy Daddy Fed who won’t be able to bail you out forever.

Hold it –  that is the wrong lesson still not learned. No the Financial Meltdown lesson of the day for operational and  management gurus is the Natalie Portman idea – yes, that  the Black Swan Events [thank you Nassim Taleb

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] do occur. And, in this Era of New Normals, more often than expected.
The idea is dawning upon the hard-hatted, industrial engineers and business-supply managers is that a)maybe Taleb and company are right, Black Swan events do occur beyond our capability to “intuit” their occurrence  and b)maybe we should buy some insurance and  time to react to these dangerous events with more inventory, some targetted diversification among suppliers and other coping strategies.
Here is what is being said in MarketWatch:

Many companies, faced with constant pressure to reduce their operating costs, now eschew long-term contracts and keep inventories to a strict minimum.“People have been complacent. Everyone just wanted a cheaper price and no one wanted to store inventory or pay in advance for stuff,” Penn said.In theory, the factory closures in Japan — and resulting output declines — aren’t insurmountable, as production in other parts of the world could be boosted to make up for the dip. In practice, however, that’s not always a viable option.“Even before the quake everybody’s factories were running flat out. We’re paying the price for running everything too lean. There is no spare capacity. There is no excess,”…

“I think it will make people realize they have to take inventory seriously. That it cannot just be treated as a horrible number on your balance sheet. It’s got to be treated as an insurance policy. It’s got to be treated as a way to take risk out,”

In general, World business and manufacturing is run with minimal slack and so very close to the margin of error. Yet time and again Black Swan events are occuring as  Climate Change, Population Growth, Resource Depletion and other factors change underlying probabilities making some Black Swan events more likely. So  the risks of the unexpected are mounting while the ability to cope with the ensuing  problems are diminishing. Worse, World Business Policy is to self-control less, reduce industry-wide regulation less and pass on those costs costs to governments, and then to work to dismantle unwanted regulations. But governments are bogging down in the quagmire of the Bush Doctrine “you can fool some of the people all of the time, and those are the ones you have to concentrate on”. In short effective top political leadership is now becoming more like a Black Swan event. So Business has to go back to DIY on self regulation and buying insurance with inventories and diversifiication of supplies even though these add to ongoing costs. But this may be a hard sell to shareholders, and so the Black Swan vicious cycle may well thrive.

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