As I look around at what is going on in global supply chains today, all I can think about is the 1963 film It's a Mad, Mad, Mad, Mad World.
Black swan events—which MacMillan Dictionary defines as “an event that is extremely rare and unexpected but has very significant consequences”—are popping up across the globe.
Consider the tensions brewing in the Ukraine. We are all now dealing with the resultant impact on energy prices and the related impact on our supply chains.
Most of us in the private sector did not foresee the events happening in the Ukraine. The U.S. military, however, saw the possibilities and implemented contingency plans many years ago. As a result, American troops are now moving into U.S.-built facilities located inside Romanian bases. Romania consigned these facilities to the U.S. in bilateral agreements, some dating back over a decade. The consigned facilities, the U.S. equipment pre-positioned in them, and troops deployed there remain under American command and control. The preparation needed to lay in the infrastructure in advance of current events shows that some saw the potential for this black swan event and planned their supply chains accordingly.
A flock of black swans
The pandemic is another black swan event that few were ready for. International flows¾both trade and human¾went sideways. The United States’ once declining trade deficit with China hit a run rate of over $300 billion dollars a year in 2021. The surge in cargo arriving at the ports of Los Angeles and Long Beach created a continuing backlog, with a fleet of containerships waiting offshore to unload. Just like the ripple effects bouncing around the global supply chain due to Ukraine, we have a set of disruptions rippling through supply chains linked to trans-Pacific trade.
While black swan events in a particular context are rare, black swan events as a class are not. We have seen demand for semiconductor chips for automobiles overrun the capacity of the chip manufacturers¾most notably in Taiwan¾resulting in a constrained supply of new cars. Nobody saw that one coming.
A similar black swan event with a wide ripple effect may also be building with magnetite supply. Refiners transform magnetite ore to produce magnesium and magnesium alloys, which are used to build many aircraft and automobiles. An estimated 65% of magnesia ore reserves are in Russia, China, and North Korea. China alone accounts for 69% of global magnetite. Magnetite is a black swan that could take flight at any time, especially now during a period of increasing tension with China.
Reduce your risk
There are steps that supply chain managers can take to reduce the risks of black swan events. An article on the Russia Briefing website provided a nice synopsis of research conducted by the Dutch bank Rabobank that listed actions that companies and governments could take to mitigate the impact of current geopolitical tensions:
- Shift from long supply chains to shorter ones.
- Move toward onshoring, as the semiconductor industry is now doing.
- Decouple from Russian and mainland China suppliers.
- Strive for assured access to and control of key raw materials sourced offshore, particularly from sources in China’s orbit.
These changes will, of course, come with a price, but effective supply chains are ones that deliver “best value”—a calculation based on a whole “market basket” of attributes, not just lowest cost. That market basket should now include risk mitigation as well as more traditional cost factors. And once you start adding the increased likelihood of black swan events into your “best value” calculation, the case for reshoring portions of your supply chain becomes stronger every day.
