Certainty in Uncertain Times (Part 1)

We are living through unprecedented times. COVID, climate-related catastrophes, civil unrest, inflation, recession, and the war in Europe continue to wreak havoc on business plans, budgets, and the supply chain. With so many variables outside the purview of business control, forecasting becomes more complex, requiring continuously increasing amounts of data and improved tools for digesting and analyzing this data. Let’s take a quick look at the impact of a few of these areas on the supply chain in recent years.

Covid – the pandemic interrupted every facet of our lives, personal and professional, and every aspect of the supply chain. Activity restriction led to a brief but damaging free fall for the global economy. The highly interconnected nature of our global supply chain contributed to the far-reaching and sudden upheaval.

As the pandemic unfolded, spreading rapidly across the globe, demand for PPE skyrocketed, with most produced in China. Factories increased production and shipments worldwide, including those with typically limited trade with China. Empty shipping containers piled up in these areas, while demand for these containers skyrocketed in China.

Demand became unpredictable, drying up in some areas almost overnight while skyrocketing in others. It forced the world to adjust expectations in light of resource scarcity, the likes of which many of us had never experienced before. Consumer spending shifted from activity-based to durable goods, now focused on adapting to work/school/home life in their new remote-based environment. Demand quickly outpaced the availability of shipping containers and warehouses; and the capacity of ports and trucking companies to handle and deliver the increased volume. Such turmoil revealed “how the need to ship surgical masks to West Africa from China can have a cascading effect on Ford’s ability to put back-up cameras on its cars at factories in Ohio and delay the arrival of Amazon Prime order in Florida in time for the holidays”¹.

Climate Change - Extreme weather due to climate change creates the added challenge of being a long-term, slow-moving crisis that is ever-increasing in intensity. In an article by Yale Environment 360, Jacques Leslie warns that “extreme weather, from floods to wildfires, is increasingly hammering ports, highways, and factories worldwide, and experts warn these climate-induced disruptions will only get worse.” ²

Think back to Hurricane Laura in August 2020. The hurricane caused petrochemical factories in Louisiana and Texas to shut down, losing 10%-15% of US PE and PP production overnight. Products from appliances and electronics to food packaging and toys were impacted. Nearly 100 critical chemicals and derivatives are processed in Texas, affecting almost every conceivable industry. A few months later, an unprecedented winter storm hit Texas in February 2021 and shut down all resin production.

These climate-related struggles have been felt worldwide. Shipping was halted on the Rhine River that February due to extreme rainfall and snowmelt. Followed in April by low water levels on the Rhine River, container ships could only operate at half capacity due to long-term drought.

2021 continued, hammering our world and supply chain with flooding in central China in July and Hurricane Ida hitting the Gulf Coast in August. “Once-in-a-century” rainfall befell British Columbia in November of that year, severing railroad and highway links to Canada’s largest port and closure of a regional oil pipeline. And December brought a typhoon that caused what TechWireAsia called “arguably the worst flooding in history in various parts” of Malaysia and severely damaged Klang, Southeast Asia’s second-largest port.

The following year, 2022, broke heat records across the globe, with the UK recording its highest temperature ever recorded on July 19. Devastating prolonged heat brought droughts across Europe, the US, China, and Africa. Higher temperatures make it easier to fall into water deficits and harder to recover. Water levels in major rivers and lakes in the US, including Lakes Mead and Powell, and the Colorado River, have become dangerously low, threatening the water supply for millions of people.

In 2022, Pakistan experienced losses of an estimated 4 million acres of crops after a severe monsoon season, and melting glaciers brought unimaginable flooding. Entire villages were swept away. Australia, South Sudan, and South Africa experienced severe flooding, and hurricanes ravaged North America.

In a press conference on January 10, 2023, NOAA Administrator Richard Spinrad discussed climate-change-related disasters. “Climate change is creating more and more intense, significant damage and often sets off cascading hazards, like intense drought followed by devastating wildfires, followed by dangerous flooding and mudslides,” he said, “as we’re seeing, for example, as a consequence of the atmospheric rivers in California right now.”²

War in Europe – We recently marked the first anniversary of the invasion of Ukraine by Russia. While most of us seemed unaware of the potential impact this might have on global agricultural markets, the Food and Agriculture Organization (FAO) of the United Nations (UN) began raising alarms almost immediately. “In fact, since the collapse of the Soviet Union in 1991, Ukraine has returned to its pre-revolutionary position as a major agricultural exporter of key commodities. It has a significant global market share by volume in wheat (10%), barley (13%), corn (15%), and sunflower oil (50%) and is ranked the fifth, second, third, and first largest exporter respectively of these crops.”³

The war is hammering away at a global food system already battered by the pandemic, climate change, and an energy shock (also a product of the war). It is tipping the scales of a fragile world towards mass hunger, the likes of which Putin may even regret, aptly referred to as “The coming food catastrophe” by The Economist magazine. On May 18, 2022, UN Secretary-General António Guterres warned “that the coming months threaten “the spectre of a global food shortage” that could last for years.”⁴ Russian control over Ukrainian agricultural areas, blockades of ports, and general disruption to planting and harvesting are some of the factors disrupting the agricultural supply chain. By June 2022, exports through the Black Sea ports were down to 0.5 million tons per month, 1/10^th of pre-war figures. This volatility has led to increased grain and global food prices and, in turn to increased food insecurity. There is a genuine concern that political and social unrest will significantly increase due to war-caused food price inflation. Early in the war, some countries had already begun adopting “beggar-thy-neighbor”-type controls to protect their own. While understandable, these will put more upward pressure on the price of food.

In addition to the food shortage ramifications of the war, an energy shock also occurred due to Putin’s aggression. Russia supplies between a tenth and a quarter of the world's gas, coal, and oil exports. As a result, European countries have been particularly vulnerable, and weeks of chaos within energy markets ensued just after Russia invaded Ukraine. Countries prepared to ration natural gas, knowing Russia could cut off supplies over the winter. The extreme immediacy of it all had governments scrambling to find alternative sources. The folly of relying on Russia prompted the EU to work towards independence from Russia by 2030, France aiming to attain complete energy independence, and Britain planning to build new reactors that create less carbon and will negate reliance on energy from despots. Yet, as Western firms leave the field “for environmental reasons and in response to high costs, the market share of OPEC plus Russia will rise from 45% to 57% by 2040, giving them more clout. Higher-cost producers such as Angola and Azerbaijan face a shock as they are squeezed out. The world map will be peppered with distressed ex-petrostates.”⁵

With how small the world has become from Globalization, these events can profoundly affect your businesses, no matter where they occur. A breakout of a respiratory infection in a city in China shut the entire world down. The mishandling of a single ship devastated global supply chains for months. A land war in Europe, once thought a thing of the past, has thrown food and energy prices through the roof worldwide and is leading to starvation oceans away from any of the fighting.

We’ve made it through the last three years, but are you ready for the next 10? Are you prepared for the next black swan event? Can you win in your marketplace, not despite the chaos but because your organization is set up to thrive off opportunities created by it?

Knowing what you know now, would you have invested in paper masks in February 2020 based on the increasingly panicked reports from Wuhan? Would that have helped your bottom line during the lockdowns? What about during the housing collapse of 2008? Do you want to be Lehman Brothers or the guy from “The Big Short”?

Are you only working on the top 20% of X, relying on Pareto law and your intuition to make decisions, or are you bringing in every bit of data you can, then efficiently turning that into actionable intelligence? And finally, ACTING on it?

I will borrow a framework from a more intelligent man than I, John Boyd. He distilled the decision-making process down to what he termed an OODA Loop.

OODA Loop –

Observe your surroundings: let’s say your empty fridge.
Orient where you are in them: I’m hungry, the fridge is empty, what options do I have?
Decide what to do: perhaps pick a recipe and make a grocery list.
Act: follow through and order/purchase the groceries.

While this is a trivial example, the critical point of this structure is that the smaller this loop is, the quicker you can act and react. And if your decision loop is short enough, you will start to look like you are predicting the future to your competitors.

Imagine for one moment the impact alternate paths would have had on our global economy.

In a 1989 speech, Nobel laureate Joshua Lederberg warned against “complacency in the age-old contest between mankind and microbes -- viruses and bacteria (and laid) out why man's "only real competitors remain the viruses”.⁶ What if those now infamous words had been a foundation for pandemic preparation?
What if climate change had been taken more seriously in the late 1950s when data first corroborated the global warming theory?
What if Europe recognized the risk inherent in relying so heavily on one country for a basic need?

Let’s look at a current example of this playing out in real-time.

In late February, when Russia appeared imminent to invade Ukraine, experts globally gave the Ukrainians 3 to 5 days before they would fully capitulate to the Russian juggernaut. And these experts had excellent reasons to believe that. The Russians successfully annexed Crimea within weeks in early 2014 with irregular troops. If the Ukrainians couldn’t push them back then, how would they have a chance against the full weight of 190,000 invading troops? Against an Air Force five times larger? Against an armored force that kept NATO Generals up at night for 60 years?

In response, the Ukrainian government mobilized every man 18 to 60, handing out 18K rifles to untrained, completely green civilians to defend the capital. These civilian-turned-soldiers have been a significant advantage over the Russian troops, who have little reason to be in Ukraine. An invading force with little to no understanding of their “special operation” and without a sense of purpose. On the other hand, the Ukrainians are fighting for what matters most to everyone: their children, their spouses, their families, and their homes, with a willingness to fight and die for the cause.

The second advantage is the way the Ukrainian military handles decision-making. In 2014 the Ukrainians still followed the Soviet style of command, where nearly all decisions flow up the chain to be made by a senior officer. If a sergeant in the field comes across the enemy, he must relay this information through multiple levels of command. The senior officer considers the information received, determines the best course of action, and passes that decision back down the chain. That decision chain might have been good enough during old set-piece battles, but in today’s chaotic, fast-moving world, this slows down the ability to react by order of magnitude. After the loss of Crimea, Ukraine focused heavily on modernizing its entire command style. They have changed to the American style, where the fear of indecision far outweighs the fear that a poor decision will be. A key for this method to be effective is a top-to-bottom intelligence service that pulls together all the disparate data streams and turns them into intelligence that they then quickly disseminate to all levels of leadership, from the highest General to the lowliest Corporal. This system empowers front-line leaders to make necessary decisions.

Back to our OODA loop:

Observe – they examined the loss of Crimea for areas of weakness in their military.
Orient –
- Their decision-chain style led to slow reaction times and ineffective strategies.
- Critical defenses were especially vulnerable due to known locations and accessibility to Russian missiles.
- Cyber defenses were too limited.
- Their Airforce was ill-prepared to take on superior forces.
Decide –
- They examined other decision-chain styles and chose the American style.
- Alternative locations were identified for strategic defenses should they need to be moved quickly.
- Collaboration with the US intensified to bolster cyber defenses.
- Additional support and training were sought from NATO members.
Act – Ukraine overhauled its military from the top down to address the issues.

The impact of this change in command is still playing out live for us.

By all accounts, Russia should have overwhelmed Ukraine in a matter of days. Russian equipment was more advanced and vastly outnumbered Ukrainian counterparts. Cruise and ballistic missiles should have obliterated Ukraine’s aging, Soviet-era defenses. The Ukrainians have continued to push back for more than a year now. The Ukrainians don’t just decide and act faster; they do so based on the best intelligence they can get and have been improving on this capability for years. In our modern era, publicly available technologies allow anyone, from news organizations to individual sleuths, to contribute impactful analysis to today’s issues, military and otherwise. Social media, smartphones, low-cost satellites, and widely available drones add to the plethora of easily accessible information.

In anticipation of Russian attacks on their key bases, Ukraine moved critical defenses to new sites in the days before the war began. Some 60 percent of Russian cruise missiles in those early days missed their target. Ukraine understood that Russia’s lack of adaptability and agility could be the key to defending itself. Russia’s rigid and centralized military required 48 to 72 hours to update intelligence, get approval, and respond to on-ground situations. By then, Ukrainians had assessed and adjusted their location, requiring the Russian commanders to begin the approval process again. That same inflexibility made the Russians easier targets, whether on the ground or in the air.

Where Russian forces counted on the element of surprise, Ukraine often anticipated and met them with unexpected fury. “Russia not only botched the attack by land and air but also put too much faith in another wing of its vaunted arsenal: hacking. Even before the first missiles and shots were fired, unit 74455 of the Russian Military Intelligence Directorate, or G.R.U., tried to infiltrate Ukrainian networks and shut them down.”⁷

The US had also worked with Ukraine for years to bolster cyber defenses. Before the war, these defenses had primarily been to defend against espionage and financial theft or sabotage. Sandworm, the Russian hacking unit, began menacing Ukraine through attacks on its power grid in 2015. Labor intensive and ineffective, an attack that took 19 months to plan only caused a six-hour power outage in 2015. The eve before Russia's invasion, Sandworm took another swing which was quickly detected and contained. However, by 6:15 AM on February 24, Sandworm had taken down the Ukrainian military’s satellite communications at their most vulnerable moment. This cyberattack could have been catastrophic had Ukraine not preemptively set up a backup plan, a separate satellite communications system, just two months earlier. One misstep after another led to additional problems for Russia; insufficient provisions like food, water, clothing, and medicine led to panic. Panic led to self-sabotage, with Russians putting sand in or poking holes in fuel tanks to disable their vehicles. Ukrainian officials who monitor cell traffic during peacetime for criminal activity noticed spikes in foreign cellphone numbers near the border. They quickly realized they could track the invaders in real-time, and eavesdropping provided precise details of planned moves. These details were then quickly relayed to Ukraine’s military officials to prepare ambushes and counterattacks. In one such instance, cellphone signals and TikTok videos provided the precise location of Chechen soldiers and allowed them to strike within 40 minutes of upload of the first video. The soldiers continued closing in on Kyiv. The eavesdroppers had to decide; destroy equipment and flee or stay put and continue gathering intelligence. Back to our earlier observation, Ukrainians were fighting for their homeland, families, and way of life. And so, they stayed.

The Ukrainian air force had also spent more than a decade training with NATO members before the invasion by Russia on February 24, 2022. The collaboration intensified after Crimea fell in 2014. Ukrainian and American pilots conducted combat exercises to prepare Ukraine’s pilots to take on Russia's technologically superior air force.

For all the planning and preparation that Ukraine had undergone leading up to the invasion, that of Russia seemed much less intentional. Much of the equipment seemed poorly manufactured and in short supply. Tires falling off. Convoys stalled due to weight issues and poorly planned routes. Inefficient resources and basic necessities. Russia spent the past 20 years prioritizing keeping US and NATO forces at bay. Kaliningrad, Crimea, and the port of Tartus were all fitted with long-range missiles to discourage Western forces from intervening in Russian conflicts. Yet, their infantry, air, and artillery forces had not trained to work together, move quickly, adapt, and repeat. There was no Plan B should the march on Kyiv fail. Fear-based leadership further undermined their ability to react and pivot, serving to deter commanders from reporting losses and setbacks to their superiors.

Two very different strategies have played out for the world to see.

Ukraine has utilized the latest information technologies to collect intelligence as rapidly as possible. Furthermore, leaders expect and encourage their military personnel to assess and adapt based on available information. These strategies have served Ukraine well by keeping them more agile and adaptive.
Russia’s reliance on old-school intelligence gathering and top-down control left them slow to react and a step behind.

We can draw much from the Ukrainian-Russian comparison related to business. Information technology is an ever-changing field. It is critical that business leaders continually strive to access the most up-to-date information as it relates to their industry. The key is to lay the groundwork for decision-making before you need it to act intelligently as expeditiously as possible. There are two options for making a quick decision in business:

Go with your gut/intuition.
Shorten the time needed to gather, analyze, and distill information into intelligence. Then, make the best possible decision based on that intelligence.

Sometimes we have no choice but to make decisions based on our gut or intuition. However, the goal is to make decisions based on facts. To do this, we must plan. We must intentionally prioritize data and analytics as the foundation of our decision-making processes.

As we will not know the outcome of the Ukrainian conflict for some time, part 2 of this series will examine a historical example and what factors played into that outcome. Stay tuned…

Certainty in Uncertain Times (Slide15)