Question

A clothing manufacturer is facing severe disruptions to its business due to the impact of the COV-19 pandemic. The regular supply of raw materials is stopped and its factory and office staff forced to work from home. The Chief Risk Officer (CRO) is asked to explain to the Board why the company was unprepared for these disruptions.

Critique the following explanation given by the CRO:

The COVID-19 pandemic is a Black Swan event and therefore could not have been identified as a risk in our annual risk assessment process.

Answer ALL of the following in your own words:

1. Explain whether, in your opinion, this scenario is a Black Swan event.
2. Explain whether, in your opinion, the risk management of the company failed.
3. Discuss what actions the company should take to reduce the consequences of future Black Swan events.

Answer 1

The given scenario could not happen abruptly and it was in the news since December 2019. For all companies present in different parts of the world, including USA and excluding China, there was a time to get prepared to fight against the contingencies created by COVID-19 pandemic. This pandemic reached USA in the month of March, 2020 and it was in the news since December, 2019. So, there was ample time to assess the impact and its severity. So, CRO claiming it to be a black swan event is not correct.

Only companies in Wuhan, China can claim that it is a black swan event as Wuhan is the worst affected city and origin of COVID-19 pandemic.

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It can be said that risk management of the company could not think of the global events that could reach out to them and hurt. Risk management always though of the traditional risks ans its impact upon the company's overall operation. But, creativity and evaluation of global events were completely missing in their risk management approach. So, it can be said that risk management approach failed to read the scenario and protect the company's operations and profitability.

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The first action is to observe global events, (good or bad), their likely impact and use of artifical intelligence to form possible strategies that can save the company and prevent the negative effect of black swan events. The second action is to develop a strong network to provide raw materials on a contingent basis. It can be done by building ties to those providers who are in the nearby areas. The third action is to change the organizational culture to be more emergent, evolving and ready to combat challenges where employees are always in the urgency mode. It will help them adapt to the scenarios, post black swan events.