Supply Chain Management and Dealing with the Unknown

Agility and adaptability are the answers

Donald Rumsfeld was a US Defense Secretary in the 1970s and again in the early 2000s. He became known for his entertaining and difficult-to-understand answers at press conferences, so much so that the BBC in London would regularly broadcast the most noteworthy of his latest obfuscations. But there is one particular press conference phrase for which it seems he will forever be associated. As we know by now, this is the famous “known-knowns, known-unknowns, unknown-unknowns” exchange. In this exchange, Rumsfeld answered a reporter’s question, as follows:

“There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know."

Huh? Understanding this the first time through is like trying to understand the meaning of a poem the first time through. In other words, it probably had the effect Rumsfeld desired.

Afterwards, this became not just an entertaining riff, but it also created a lot of discussion regarding the underlying meaning. It’s also a testament to the power of words and ideas that Rumsfeld became almost as well-known from this exchange as he had from his fifty-plus years of public service. In fact, the attachment was such that he titled his memoir “Known and Unknown: A Memoir.”

It’s important to point out that Rumsfeld was not the first to use these words or the ideas behind them. He simply repurposed them at the right time in the right context. He also seems to have popularized it as a framework; it has been widely used in the past 15 years across a wide variety of domains.

What Rumsfeld was explaining is a framework for cataloging risks. Last month, I published an article titled “Supply Chain Volatility,” in which I discuss volatility in the context of the supply chain stress caused by the coronavirus pandemic. A number of readers astutely pointed out that you cannot know, a priori, everything that the future holds. Given that, how do you deal with unknowns?

Here, I will use the Rumsfeld Known-Unknown framework as a tool to address these questions and add to the discussion. I also venture into a fairly wide-ranging discussion on supply chain dynamics, all based on the earlier variability-volatility discussion. My apologies for perhaps not staying on point, but, like a lot of things related to supply chains, these topics are highly intertwined.

Note: in the earlier article I discussed agility as the antidote for volatility. In this article I draw a distinction between agility and adaptability. While I draw this distinction, I would like to point out upfront that agility is the enabler of adaptability.

Supply Chain Volatility Matrix

First, let’s clear up what Rumsfeld meant in the known-unknown dialog, putting it in a supply chain context. To do that, we will adapt the known-unknown construct to a 2x2 framework (this has been widely done over the course of the past 15 years for various risk contexts). In this situation the 2x2 is used to catalog events – either internal or external to companies – that create supply chain volatility. The general matrix is shown below.

Along the X axis are the things that we know or do not know; therefore, the left half of the chart represents things we know; the right half of the chart represents things we do not know. In a supply chain context, this means there are certain events that we have seen before, or even if we have not personally seen them, we know about them. This is a binary axis – we either know about them, or we don’t. The Y axis represents what we know about the impact of events (this is slightly different from what Rumsfeld meant, but is useful for this discussion). As shown in the above, we will use an of X-Y approach (x-axis first, y-axis second) when referring to the four quadrants of the 2x2.

The Rumsfeld framework originally included just three of the four 2x2 quadrants; there was no unknown-known quadrant (lower right corner). This quadrant was suggested afterward to represent things we know but choose not to know; in other words, these are things we choose to avoid or fool ourselves into disbelieving. This is the Ostrich quadrant. It might also be called the “you can’t handle the truth” quadrant. I will refrain from commentary as to what might go into this quadrant. We can all think of many things that might go into this category. Pain avoidance, short-term thinking, convenience, inertia, hubris, and just plain stupidity all contribute to things that might go into this quadrant.

Now let’s see if we can make this a little clearer by cataloging volatility-causing events into the quadrants.

A lot of these event categorizations are of course, in the eye of the beholder. What is known to some may be unknown to others (therein lies opportunity. See the book “The Big Short,” which I recommend people read about every five years).

For example, certain events – pandemics, volcanoes, financial derivatives – are in fact known, but only by a small sliver of the population who cannot convince the rest of us to get educated and prepared for the consequences. This means that for a lot of us, these are unknown-unknowns, when in fact when we look back in retrospect, they were known-unknowns. Bill Gate’s prescient warnings about the pandemic are an example of this. In fact, he now regrets he was not more forceful in his arguments.

For example, some have suggested that while the pandemic may have been a known entity, its economic impact was a big unknown. This makes it a known-unknown in the 2x2 framework. As I have previously said, this is probably true, but once you have a pandemic, your position on the chess board changes considerably, therefore changing significantly the conditional probability of a whole host of other events.

It’s interesting to consider climate change in this 2x2 framework. What makes it interesting is that it could fall into every one of the four 2x2 quadrants, depending on whom you ask. Some people say it’s a known-known, some say it’s a known-unknown, some say it’s an unknown-unknown, and then there is a certain segment that would just rather not talk about it, so it could also be considered an unknown-known.

As the arrow in the above chart indicates, unknowns become knowns as time unfolds. This is the learning process. With each new unknown making itself known, we learn, understand, and develop playbooks. This process is critical to developing resilience. Alas, there are obviously some people and organizations that are better at this process. What do they do better than others? This is explored further below.

In the above chart, I have included in the unknown-unknown examples a couple of interesting items:

• Poor current decisions

• Poor past decisions

• Disruptive new competition

• Multiple interacting knowns

These are unknown-unknowns because it is almost impossible to say that a series of decisions resulted in one outcome or another. As Daniel Kahneman and others have pointed out, it’s also difficult to control for the factor of luck.

Furthermore, in complex systems (described below), it may be impossible to know beforehand the impact of a sequence of events, each of which individually seems benign.

What’s Needed in Each of the Quadrants?

Agility and adaptability are the key capabilities needed for dealing with different volatilities. Agility is necessary for dealing with known volatilities, and adaptability is necessary for dealing with unknown volatilities. I’ve added a third capability – enlightenment – that’s necessary for dealing with unknown-knowns – those things where we deceive ourselves or where we fit data to our biases.

What are agility and adaptability?