Black Swans Everywhere

One of the things economists and industrial end users have in common is: Both hate black swans.  But what is a Black Swan? Nassim Nicholas Taleb's Black Swan Theory explains it this way: “What we call here a Black Swan (and capitalize it) is an event with the following three attributes. […] rarity, extreme 'impact', and retrospective (though not prospective) predictability.” Black Swan events are outliers, cannot be anticipated and thus lead to unpredictable indirect effects. 

 Economists hate these events, as they make forecasting very difficult, ruin time series and everything predicted just goes into the bin. That is why economists play it safe and say “ceteris paribus”, i.e. predicting how everything will develop, if nothing fundamentally changes.

 Industrial end users hate Black Swans, because they can disrupt their plants, planning and markets. This may lead to inefficiency, re-organizations, and other unexpected challenges. Automation suppliers and machine builders hate Black Swans, because they are at the end of the line and may experience the so-called bullwhip effect. When end users reduce their CapEx by 5 percent, it can easily cause the supplier to lose 20 percent or more of their revenues. ARC Advisory has observed and analyzed this phenomenon multiple times.

Current Black Swans

These last years have been marked by some extreme events. But there are many more Black Swans currently flying around us, and it is close to impossible to foresee, when and if one will land and cause disruptions in our industries. These are amongst the most notable ‘birds’ out there: 

1. War in Ukraine: It can turn uglier, maybe even nuclear, it can disrupt supply chains (even further) and cause further inflation.
2. China’s aggressive stance towards Taiwan and other states in the South China Sea: This can destabilize the whole region, which is a crucial part of the global value chains.
3. COVID is still looming: While most countries have loosened their COVID measures there is still the threat of a possible new mutation. This could lead to a repeat the extensive disruptions, we have just experienced.
4. A long, dark, cold, windless winter: Mild weather and political measures helped to stabilize supply. However, a combination of a harsh winter could cause even higher prices and even lead to power outages causing further disruptions.
5. Semiconductor shortage: It is hard to predict how and if the supply chains will recover.
6. Inflation and rising food prices: these factors may lead lead to civil unrests and political turmoil.
7. Extremist governments: The combination of high prices, refugees, shortages and outages can lead to more extreme right governments being elected in Europe. Other countries following the UK Brexit can cause serious turmoil in Europe and the whole world.
8. Demographics: Ok, I stretch the concept a bit here, as demographics are something that you can monitor very easily, death and birth rates are known as much as working age, etc. But think in the framework of a supply chain, certain positions are often just held by 1-3 people and when the wrong people leave the company demographics, it can easily lead to disruptions along the complete value chain.

Maybe some will argue, these are not black swans but something else. Others will argue that about other events, but I left out events such as the earth being hit by an asteroid, as it makes this article shorter and most probably we won’t care about automation markets, after we were hit by an asteroid.

Resilience and Antifragility

Entrance into the theory, read here: https://en.wikipedia.org/wiki/Antifragility, in short: "Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.".

Of course, I cannot answer the solution for each of the companies to each of the black swans. We will discuss this at our Forum in Barcelona. What I want to share here are some observations that I made during the SPS show in Nuremberg and the NAMUR general assembly, as resilience as a key topic there. We chose this topic for our forum some weeks ago and I was thinking along these lines for quite a while and therefore it made me smile, when exactly this topic was picked by Siemens for the SPS press conference.

Automation: Obvious? Maybe, but there are still many tasks, which can be automated around data, business processes, etc. mainly repetitive tasks not on the plant floor, but in operating rooms, and offices. In a survey of plant operators, it was exactly these kind of tasks, which were sought to be automated in future to lower support the operators, free resources and make the people ready for creative problem solving – and who would not argue that this makes a company more resilient and even antifragile.

Modularity: There are whole books around this topic and many are highly academic.  See for example here https://link.springer.com/chapter/10.1007/978-3-319-30070-2_4. To quote this book: “The first step to avoid propagating local failures in networked computer systems is to modularize the systems.”

Think of these examples:

• you operate a modular plant, a module fails, and another module can step in
• you can ship modules around the world and quickly re-use them, e.g. remove them from a war zone
• Using MTP concepts, means you can use modules equipped with basically all PLC / DCS vendors and standardize on a higher level.
• You can react more quickly to changes, reduce changeover time and be first to market. In the case of e.g. vaccines for COVID this was of high value.
• Scaling up and down is easier. Failing is associated with lower costs and you can try out new things. A modular plant is also more energy efficient compared to a traditional plant, when it is operated below its optimum capacity, as you scale up and down in numbers, not size.

Less integration: Sounds counter intuitive but is a measure to get stronger than your competitors. Having tightly integrated systems of e.g. controller and programming tool or a large monolithic MES. Initiatives, such as OPAF, universal automation, MTP and others move in this direction. This is also a way to …

Reduce (inter-)dependencies: Having more than one supplier for a certain field device, controller, etc. makes you more resilient against supply problems. We still have reports that delivery times of certain controllers exceed 50 weeks or so.

Digitalization: Digitalization can make you more resilient as well as antifragile. When processes are digitized, they are codified / written down and can be shared. A digital twin can be sent to be (re-)produced anywhere in the world (as long as the CAD drawings follow a certain standard (see below), a plant maintenance staff can be supported by experts in a competence center elsewhere using a digital twin, and maybe even VR / AR.

Standardization: This is a resilience measure. Using standard technology makes it transferable. You can bring outside people in, and they are able to work with tools, products, and procedures they already know. When you think about the music example earlier, most technologies worked for decades, and all are standards. There were other technologies in history, which never made it to a global standard and failed, such as Betamax or Mini Disc.

Regionalization: It may sound strange, but slight over capacity and a move away from one global world-scale plan can not only increase your resilience, but can make you stronger in crisis, as you can then serve the market while producing 100 percent and sell to others at a high price.

Care about your employees: In times of scarce labor force, we should all be extra nice to the people we already have. Leave people some room to breathe. This makes them more creative and ensures satisfaction. With a lower turnover rate, the lack of engineers is simply a smaller problem.

Real-life example: Music

Nicolas Nassim Taleb also looks into the robustness or resilience (and antifragility). Probably the most intuitive example is that of music and media. So let us take a look at how we exchange music. Sidenote: When you are more interested in the example of music, look at David Byrnes book “How music works”.

As strange as it may sound, the most robust form of saving music over the whole time was notated sheets. The same is true for other modes to store knowledge. Most of us cannot read or write to the floppy disks from our youth, but we can still read our grandparent’s books