microeconomics, macroeconomics, risk, supply-chain, productionI was surprised by current hdd prices as I ran out of memory and had to buy a new one. After some googling the reason was clear. Supply-chain was and will be broken for probably several weeks. I’m no expert and have no idea how often such things happen, forcing other companies to shut down production significantly (Notebooks, Cloud-Computing, …) But this seems to be no ordinary case.
The question to me is, have companies/institutions to investigate what went wrong here and who has to come up with a solution? While just-in-time production guarentees low prices, the risk the few hdd companies accepted (but also the dependent companies) vs. a broken supply chain was probably too high from a macroeconomic point of view, too many companies and consumers now suffer from this situation. I would have thought there is more competition in such a huge market and more supplying companies, more risk sharing. What are solutions, lessons to be learned from such a case? Do such industries need a branch-wide risk fund in a globalized economy or at least a common risk calculation and managment? Subventions to further competition? Region-wide business plans developed by all companies in a supply chain?
There’s probably a formal name for the particular type of strategy I’m going to discuss, but I don’t know what it is. So I’ll call it the White Swan Strategy, as a nod to Taleb. I’ll update this intro if someone gives me the formal name.
The White Swan Strategy aims to make long-term profits through accruing lots of small incremental wins. The challenge it faces is that the actions required to obtain the small wins usually involves paring away resilience; and that sooner or later, an event that was otherwise considered extremely unlikely or impossible (the Black Swan) comes along, and because of the reduced resilience, large one-off losses are made. Three things make the White Swan Strategy exciting:
And that makes it a very big gamble as to whether or not the accumulation of lots of small incremental wins outweighs the rare large loss. The White Swan Strategy is a high-stakes game where no one is quite sure of the odds.
Just-in-time manufacturing is a White Swan Strategy: incremental cost savings are made through potential fast flexibility of choice of supplier, reduced costs of holding stock, and reduced losses from expired stock. All this comes at a risk of a sudden spike in costs: any delay in the supply chain, means that customers won’t get their goods.
Geographic agglomeration can also result in a White Swan Strategy: it enables lots of smaller producers to take advantage of some network effects and some economies of scale that would otherwise be unavailable to them. And those cost savings get passed on to their customers. However, if those customers choose to let the small cost savings outweigh the risks of lack of geographical diversity in their supply base, then they’ll make lots of small cost savings over time, but if any geography-specific event happens (such as the Thai floods), then the lack of supply-chain resilience will turn into a sudden spike in costs.
Added to those White-Swan-Strategy effects, there’s also a potential degradation of the Commons going on: anthropogenic releases of greenhouse gases cause changes in climate; but all our manufacturing (as well as habitation and farming) is predicated on the climate as it was throughout the twentieth century. Which means that climate changes can change formerly cost-optimal location decisions to become very sub-optimal. Events such as the Thai floods will become more common, and although we cannot say for certain which extreme-weather event was or was not the result of human-caused climate change, we do know that the frequency of those will increase.
As usual with these degradation of the Commons, we reach an aggregate state that is very sub-optimal, even though it was the result of the accumulation of individually-optimal decisions.
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