Disasters and the Logistics of Black Swans
It is difficult to overstate the impact that Hurricane Harvey has already had -- and will continue to have -- on the ocean freight shipping industry. As the superstorm began to batter the Texas and Louisiana Gulf coasts on Friday, the ports of Houston, Galveston, Texas City, Freeport, and Corpus Christi all shut down. With several more days of rain set to come, it is difficult to estimate the total financial and operational impact on the shipping industry.
The ramifications are not limited to ocean freight. According to the Journal of Commerce
Truck spot rates in the region are expected to spike, and freight backlogs will delay deliveries once the floods recede. Logistics operators said a return to normal activity will be slowed by the need for inspection and repairs, and by workers’ transportation difficulties and need to tend to flooded homes (JoC)
In addition to the immediate disruptions in the local economy, the storm has shut refineries accounting for 15% of U.S. fuel-making capacity, or more than 2 million barrels a day, according to the Wall Street Journal. And cruise ships carrying up to 20,000 passengers have been redirected, depriving the area of much-needed tourist dollars.
How much will all of this cost the economy? It’s impossible to know at this stage, but it’s clear that the entire infrastructure of the nation’s economy has been affected because of this one localized storm.
The logistics industry -- including our specialty, ocean freight shipping -- is built upon seemingly irrefutable economic and mathematical principles. We meticulously calculate available capacity, cargo size, and other variables. We rely on the economics of supply and demand to determine the right price for certain cargo at a certain time. Our predictions are based on patterns of past events, assuming that little will change.
Read More: Small Is the New Big
Hurricane Harvey has shown us that such calculations have their limits. In 2007, Nicolas Nassim Taleb published his seminal work The Black Swan: The Impact of the Highly Improbable. In it, he argues that we underestimate the probability of highly-unlikely events, largely due to the psychological limitations of our imagination. That’s why, despite the best efforts of Wall Street’s great minds, we still have stock market crashes and housing bubble bursts. He argues that it is these “Black Swan events” that determine the direction of history - not the normal to-and-fro of short-term fluctuations.
This hurricane (at first called a “hundred-year event,” but now becoming more like a “thousand-year event”) certainly qualifies as a Black Swan. But if Black Swans are by definition unpredictable, how do we plan for them? We can’t spend infinite resources at every port to protect against a thousand-year storm, can we?
Since we cannot predict these events, perhaps the best approach is to prepare how to react to them. We must be humble and realize that we cannot plan for every situation -- particularly those involving Mother Nature. So perhaps the solution to unknowability is flexibility. Let the system absorb shocks. Plan our logistics chains so they are more fluid and can adapt to unforeseen circumstances. Build our infrastructure with better contingency plans in place to reroute critical supply chains.
There is no science surrounding how to plan for the unpredictable. But the first step to recovering from events like Harvey is to open our own minds, question our own assumptions, and recognize that sometimes the impossible happens right on our doorstep.
By: CoLoadX on Aug. 30, 2017, 1:03 p.m.