Tail Risks in Supply Chains

With Brexit, the Corona Virus and the Iceland volcanic eruption, we can say that our recent history is littered with systemic events that have caused disruption on a massive scale. For this episode of LokadTV, we discuss whether these rogue events can ever truly be fully planned for and what a supply chain planner can do to limit their impact on their business.

What do we mean by “Tail Risk”? It’s all the risks that don’t happen systematically and are inherently unexpected. They are extreme events and they often kill companies. They may only occur once in a decade, but companies should be prepared.

Although tail risks may seem improbable, they can actually be predicted to a certain extent. For example, at Bill Gates’ 2015 TED talk in Vancouver, he stated that a “highly infectious virus” would be the largest risk to humanity in the upcoming years rather than any war or natural disaster. Despite how much the world has evolved, human history is somewhat cyclical and can be analysed accordingly.

For most tail risks, an obvious supply chain strategy seems to be stockpiling. However, we go into more detail about why this is more often than not an expensive, highly naive and ineffective option. It’s something that we’re even seeing in real-life right now on an individual level, with empty shelves in the supermarket as people stockpile pasta and toilet paper. Stockpiling goes directly against lean supply chain approaches, such as Kanban and the stockless supply chain. While stockpiling can be the response to certain classes of problems it is often a short-term answer and not long-lasting, as there are few things that can be stockpiled for a large amount of time, whilst tail risks are in nature infrequent. This is a problem that military supply chains often face.

We talk about more cost-effective solutions such as a more agile production line, where you can rapidly switch from one type of production to another to create new products that meet demands, as many products share the same basic compounds. In modern supply chains there is ironically often a lot more rigidity due to software. For example, switching from one warehouse to another can be done in a few days, changing from one ERP to another? Not so easy.

To conclude, we discuss pricing strategies and their various complexities. In addition, we talk about governments getting involved and enforcing price controls and the highly important issue of ethics and shortages, such as the current shortage of antibacterial gel due to Covid-19 and how basic human behaviour plays a vital role.

Timestamps

00:08 Introduction

00:26 What is your overview of long tail risk?

02:57 How do people tend to approach these Black Swan scenarios that occur once in a decade?

05:18 What can companies do to mitigate the risk that occurs from these scenarios?

06:54 These events are so sporadic, can we ever begin to forecast when they might occur and the potential impact?

09:36 Are there any other methodologies out there that mitigate for these scenarios?

11:49 If stockpiling is not a good strategy, what is a better strategy to take?

14:51 One way of reacting is adjusting pricing. Why is this so beneficial?

19:13 How would you expect customers to respond to the prospect of there being a limit on what they can buy?

21:07 So if pricing is an obvious approach, what other less obvious solutions are there out there which could be beneficial?

22:41 Is the main lesson of tail risk is that it is a scenario that will inevitably occur and the main way we can protect ourselves is by being flexible and responsive with our supply chains?