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Byproducts, black swans and supply chain risk

The last week has seen a chain of events that demonstrate the unexpected peril again within the supply chains that surround us. It is helpful to pull this out and look at how we might think about supply chain risk differently.

During the last week, a link in the electricity supply cable from the continent to the UK suffered damage in a fire, removing 40% of the UK’s capacity to import electricity. This meant that the gap in supply had to be filled by gas and coal-powered power stations firing up. In turn, this caused a surge in the short term price of gas, as the UK’s somewhat free market in power went to work. As a result, one of the UK’s major producers of fertiliser decided to close down their operations, as gas is a major cost input to their process. As these facilities produce much of the industrial CO2 in the UK, used in a huge range of other processes, there is now a CO2 shortage (ironically, as COP26 approaches). Food trays used in meat and fresh produce distribution (those little plastic trays your chicken/beef/apples sit in when you buy them from the supermarket) are likely to go into shortage as they depend on the CO2 supplies. So, fire in Kent = restriction in food supplies.

This type of chain reaction in supply chains is more common than we might suppose, although more likely to happen in a microeconomic way than a full economy effect. A previous example includes the 2008 slowdown in car production, which reduced car bumpers (fenders). One of the byproducts of bumpers is the solvent used in gas chromatography, which is a fundamental part of the testing regimes in both the food and pharmaceutical industries. So, the slowdown in vehicle production leads to a shortage of the correct grade solvent, reducing testing capacity and causing headaches in heavily regulated industries.

So, the big question in our category strategies is, do I have byproducts of unrelated processes in my supply chain? If I do, have I got a way of scanning the security of that supply chain to understand risks, which may go outside the normal reviews that I undertake?

The issue, of course, is that there is so much interconnectedness in supply areas that it is hard to distinguish those that are manageable risks compared to those that are not. In the case of the fire in Kent, the linked set of events has been described in elements of the press as a ‘black swan’ event – one which is an unexpected event of large magnitude which has large consequences. The interesting aspect here is that the events are often rationalised afterwards. The core author commenting on black swan events ( Nassim Nicholas Taleb) notes that the rationalisation often leads to a belief that the event could have been predicted, although that is a false assumption.

This seems to suggest that there is a rational limit to the analysis which could or should be undertaken when looking beyond our immediate supply chains, and there is always the potential for risks, however unlikely, actually occurring.

However, it is still worth looking at supply chains to see the impact of byproducts might be – there may be something manageable and looking for ways to reduce risk in these times seems a worthwhile activity to manage our stress.

https://en.wikipedia.org/wiki/Black_swan_theory

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