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by fennecfoxen 1753 days ago
Being a resilient company only means that when it’s time for an industry bailout you get less than your competitors because you’re doing better.

Private profit, socialized risk.

2 comments

On the other hand, companies that have inventory right now get to increase market share over those that didn’t think ahead and have nothing to sell.
But if the optimal strategy only falls apart for uncommon events that you can't determine when they happen, how much of an incentive is there to run a conservative/gambling strategy like that?
It depends on your objectives. One bad event can put many companies out of business. The auto industry is a good example because US-Canadian border issues and snow can fubar things for half the year.

Look at companies like Boeing with absurdly complex supply chains. The inventory numbers look good, but the factories are idle when a truckload of magic bolts is stuck in a blizzard in South Dakota.

It also increases actual cost. I supported a GE business unit as a supplier for awhile. We hosed them for stupid last minute orders due to this sort of thing. They would pay more for expedited shipping, overtime, waste money on leasing stuff to avoid capex, etc.

Uncommon events are uncommon individually but common in aggregate.

Maintaining resilience and designing antifragile systems usually pays off in missed disasters and unique opportunities.

Alternately, to save money without buffers is to continuously gamble.

There is no optimal strategy because there is no perfect knowledge. That's why good CEOs are paid their weight in gold. A vision and steady hands can pay off handsomely.
Depends completely on the risk vs reward. Black swans are more common than can be assumed from modeling past data so in general a slightly more conservative strategy than industry standard is more likely to win.

For example COVID style shutdowns could be reasonably modeled at X% per year after talking to a disease specialist. But, not all of them are going to be from diseases.

Depends entirely on the time frame. If you have a superior capital allocation scheme, by all means, capture all the value left on the table then.