Writing this in the early days of November, it feels insufferable to prognosticate on what COVID-19 has taught us, and by corollary what supply chain lessons we should carry forward into 2021. Some describe 2020 as a “black swan,” an aberration that cannot be planned for. Others, meanwhile, say that the increasing complexity of global networks creates supply chain uncertainty which must be accounted for in long-range contingency planning.
In his book on the subject, The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb defines black swans as surprise events that have a major effect on a market and are not prospectively predictable — only hindsight.
To call 2020 a black swan may serve to absolve all parties from being prepared for its impacts, but is the industry well served in doing so?
While the exact timing of the COVID-19 pandemic was not predictable, epidemiologists report that a global pandemic like COVID-19 was indeed statistically predictable. And although no one had forecast the dearth of vessel space and rapid rise of ocean freight rates that resulted from the pandemic, the underlying mechanics that have facilitated this outcome — e.g., the market power of alliances, capacity management, carrier consolidation, the reduction in containership orders, and the idling of ships for scrubber installations — were all well understood prior to 2020. Also understood was the removal of slack in the global transportation ecosystem costs by asset providers, including shipping lines, ports, terminals, and land transport providers, driven by the constant pressure to reduce operating costs to achieve profitability.
In other words, while few predicted 2020 would evolve as it has, the information needed to understand what the likely outcomes would be if a market shock like COVID-19 occurred was available.
The inability to plan for these outcomes derives from an asymmetry of information in the shipping industry, transactions in which one of the two parties involved has more information than the other and, thus, has the ability to make more informed decisions. This asymmetry can cause market failure, wherein the laws of supply and demand that regulate the pricing of services are skewed. It can be argued that the mismatch of capacity supply from carriers and the demand required by shippers have created this phenomenon in the shipping industry today.
Due to the interconnected nature of global supply chains and a reduction in system slack, future unexpected events will produce similar market shocks. Inadequate risk management can have a severe impact on company performance.
Understanding demand, supply, and manufacturing process uncertainty can reduce risk at its source and minimize its impact on performance. Shippers must plan for the eventuality of additional market disruption and build in system resilience and contingency plans for their supply chains immediately. Critical planning components include understanding customer demand, partner selection, and communication.
Consumer buying patterns have changed in 2020, driven by rapid increases in e-commerce and a replacement of services spending with goods consumption. These new demand patterns need to be incorporated into volume projections and communicated to supply chain partners, as carriers rely on shippers’ demand forecasts to plan for adequate capacity. Understanding lead times and the network effects of individual node failures allows shippers a first-mover advantage to modify their supply chains and lessen the impacts of a disruption.
Shippers should empirically understand and differentiate those suppliers that acted as partners — i.e., honoring commitments and proposing solutions — during the COVID-19 crisis, as opposed to those that acted as vendors, and reward the former. Partnerships are not built on spreadsheets alone; it is imperative to recognize and nurture key partner relationships that will endure through a crisis. Collaboration and effective information-sharing breaks down barriers between supply chain stages and partners, fostering an integrated and seamless supply chain.
Removing information asymmetry requires hypervigilance and an ethos of continuous learning and information sharing. There will always be another 2020 lurking around the corner, but for those who plan accordingly, its impacts can be mitigated.
While the COVID-19 pandemic may not have been a true black swan event, its impacts should be incorporated into our future supply chain planning. Taleb reminds us that while Thanksgiving might be a black swan surprise for a turkey, it’s not a black swan surprise for its butcher. In 2021, shippers should look to arm themselves with enough information to be the butcher, not the turkey.