3 Ways to be Better Prepared for Black Swan Events
A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black Swan events are typically random and are unexpected.
While the concept of a Black Swan event applies to financial risk, increasingly it is also being used in the domain of operational risk to refer to unexpected events with a low probability of occurrence, but with severe impacts when they occur. The impacts of Black Swan events on operations is amplified by global supply chains. For example, a natural disaster, such as the 2011 earthquake and tsunami in Japan that led to the Fukushima nuclear disaster, can impact business operations when important actors in the supply chain are affected. Black Swan events are not just natural disasters. They can also include political events (e.g. the outcome of the 2016 Brexit referendum which was not expected by financial markets) and workplace disasters (e.g. the 2013 Rana Plaza collapse in Bangladesh that placed a very intense spotlight on retailers and the apparel industry half a world away).
By definition, organizations cannot fully prepare for Black Swan events. Since they are random and unexpected, they are almost impossible to anticipate, and thus to prepare for. That’s why one could argue that the title of this post is contradictory. But while nobody can anticipate Black Swan events, organizations can take steps to minimize their impacts. Here are three such steps.
1) Map the Supply Chain and Supply Chain Risks
Because Black Swan events are unpredictable by nature, they can happen anywhere around the world, meaning companies with global supply chains are vulnerable. Companies should map their supply chain and suppliers to have an accurate assessment of the impacts of a Black Swan event when it occurs. Mapping a supply chain is not just about having an oversight of the geographic locations of all suppliers around the world. It also means mapping suppliers against product lines, business units, manufacturing plants that rely on supplied parts or materials, etc. Once the supply chain is mapped, the next step consists of quantifying the amount of supplied parts from each supplier.
In addition, the information will help to assess supply chain risks and develop plans for alternative sources of supply. For example, if you rely on only two suppliers in China to supply 100% of a critical part of a product line responsible for 40% of the company’s revenues, there is a substantial supply chain risk that needs to be mitigated. Either you search for alternative suppliers that you can purchase from, if the two original suppliers are unable to operate, or you increase the stock on hand of parts purchased from the two suppliers.
2) Implement a Business Continuity Management Program
A Black Swan event can also impact an organization directly, not just through its supply chain. For example, if a financial crisis occurs, such as the one in 2007-2008, and access to credit becomes tight, it may be more challenging for a company to secure loans. The development of a business continuity plan can help organizations be fully prepared for Black Swan events. As explained by the Business Continuity Institute, business continuity “is about building and improving resilience in your business; it’s about identifying your key products and services and the most urgent activities that underpin them and then, once that ‘analysis’ is complete, it is about devising plans and strategies that will enable you to continue your business operations and enable you to recover quickly and effectively from any type disruption whatever its size or cause.”
Developing an effective business continuity plan requires an integrated business continuity management solution that provides a structured approach for analyzing, designing, testing and executing business continuity plans. According to an OCEG poll, while 75% of respondents indicated that their organization has a formal program for BCM, 55% of them indicated that word documents, spreadsheets and document management tools are used. Only 20% are using some type of BCM software. This indicates that business continuity management is widely adopted, but it is not as centralized and automated as it should be. Having a business continuity management software implemented helps organizations face the potential consequences of Black Swan events.
3) Develop a Communication Plan Aimed at Reducing Uncertainty
“Markets don’t like uncertainty” is a sentence that we have heard many times. But it’s not only markets that don’t like uncertainty, it’s everyone: suppliers, customers, partners, employees, NGOs, etc. In addition, sometimes when an event occurs, the reaction to the event can be more intense than the event itself due to panic, exaggeration, fear, misinterpretation, etc. Black Swan events are not immune to this. They have the potential to create great uncertainty and people can overreact to them. This can lead to even more severe impacts from a Black Swan event, such as loss of customers, increased employee turnover, loss of brand reputation, etc.
To successfully counter the possibility of uncertainty created by a Black Swan event, and the impacts from that uncertainty, develop a communication plan that will: 1) identify the key stakeholders that you will communicate with, 2) the type of communication that will apply to each stakeholder (e.g. direct mailing, social media, press release, phone calls, etc.), and 3) the contents of the communication (e.g. steps taken to mitigate risks, contingency plans, etc.). If a Black Swan event occurs, the communication plan can be put in motion to reduce uncertainty and re-assure stakeholders that the organization has the resilience to withstand the impacts of the event.
Finally, there is a common theme that runs through all three items mentioned in this post: agility. An organization needs to be agile to be prepared for Black Swan events and turn risks into opportunities. It needs to be agile by, for example, being able to successfully switch suppliers to maintain production levels, recover quickly and effectively from any type of disruption through business continuity management, and promptly communicate with key stakeholders to reduce uncertainty. Agility is the common ingredient to everything.