What the Gambler’s Fallacy Can Teach Us About Risk

Don't ignore Murphy's Law when making business decisions.

Have you ever heard of the gambler’s fallacy? In essence, it’s a cognitive bias in which one assumes that future probabilities are affected by past events.

In other words, it’s the belief that something bad won’t happen in the future because you avoided calamity in the past. There’s a valuable business lesson within this misconception.

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Years of uninterrupted service from a supplier mean nothing if a disruption occurs tomorrow.

Remember that years of uninterrupted service from a supplier mean nothing if a disruption occurs tomorrow.

The goal of every business is to provide the customer with the best possible experience and make them return again and again. But businesses do not operate in a vacuum. They rely on other businesses to supply them with the goods and services to deliver that customer experience.

But how much do you really know about those relationships you depend on every day? And do you really want to risk the future of your business on blind assumptions?

Some businesses conduct initial due diligence on key suppliers to determine if they are reliable partners. That’s a good idea, but it’s only the start. Top performing supply chains continually manage their supplier networks.

Acing the diligence test

Initial due diligence should include an independent credit and financial assessment of the supplier. If they pass muster, on-site visits, interviews and inspections of production facilities should follow.

Here’s the twist: Encourage the supplier to do the same for your organization. This fosters mutual respect and cooperation by showing you have nothing to hide and that you are proud of the business you’ve built.

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Top-performing companies continually manage their supplier networks.

Agree to share data on supply, demand and product performance. Once this process is complete, write up a contract allowing this arrangement to continue for the duration of the relationship. The two organizations ultimately should be operating as a single entity.

Trust and mutual respect are invaluable assets for businesses of all sizes. Business relationships are interpersonal relationships: two parties cooperating to achieve a mutual goal.

This is no one-off campaign, either. Businesses and business conditions change. Signs of stress often become apparent long before a disruptive event occurs. Engaging a vendor that specializes in credit monitoring, for example, can be a simple and inexpensive solution.

Looking ahead

Look at the location of each supplier to determine the supply chain disruption risks they may face. For example, if they are located in areas prone to earthquakes, typhoons, tornadoes or wildfires, do they have the appropriate contingencies in place?

If a supplier is dependent on volatile commodities like energy or rare minerals, have they hedged their exposures or sourced alternative suppliers?

Some suppliers are located in markets with high levels of political instability, corrupt law enforcement or compromised judiciaries. Understand your supplier’s vulnerabilities and monitor the trends and events likely to have a negative impact on their business.

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Keeping both supplier and buyer focused on the end customer experience is the ultimate goal.

A business continuity plan is not only critical for your business in the event of a disruption. You should ensure that each of your critical suppliers has a plan as well. Then meet periodically to ensure the plans work in tandem.

Another area of supplier collaboration is in product design. An experienced production team can look at a product design and offer improvements that reduce production time and costs.

If your supplier relies on a single large buyer for the lion’s share of its production and revenue – and it’s not you – find additional sources of supply. If that supplier experiences a disruption and is forced to reduce output, your rank in the pecking order may leave you high and dry.

Watch for unusual levels of management turnover among your key suppliers. A moderate amount of management change exhibits a welcome environment for new ideas.

It also demonstrates a willingness to change as markets change. Too much turnover, however, indicates underlying problems, fundamental strategy disagreements or financial issues.

If your organization does not have a chief supply chain risk officer, a high level manager should stay on top of geopolitics, the economy and weather via business and news sources and industry publications.

Don’t lose it all

Visiting suppliers regularly is a critical requirement for understanding the supply network’s changing nature. Collaborative relationships build trust and are imperative when managing a supply network.

Seeing the operations of your key suppliers, sharing data, integrating mutual business processes and monitoring quality and performance against contractual standards cannot be done behind a desk. Keeping both supplier and buyer focused on the optimal end customer experience is, after all, the ultimate goal.

Take these steps, and you won’t be like that gambler at the Blackjack table wondering what went wrong when they made the same bet as usual – and lost it all. goldbrown2

You might also like:

Hidden Risks in Your Supply Chain

Accidents Happen. Are You Prepared?

An Up-to-Date Twist on Supply Chain Risk: The Survey Says….


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Bill Woodring monitors and provides analysis on Market and Competitive Intelligence for UPS Capital, with a specific focus on Supply Chain Risk. UPS Capital is UPS’s insurance and financial services subsidiary.

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