Supply Chain Climate Change Risks Poised to Worsen

“For the last 4 years,” report PwC analysts Brian Dunch (@Brian_Dunch) and David Sapin (@drsapin), “‘Extreme Weather Events’ has ranked as one of the top 5 risks in the Global Risk Report published by the World Economic Forum (WEF). In 2016 there were 15 extreme weather events in the U.S. which individually exceeded $1 billion in losses, not including the trailing economic impact of the areas affected. The number of such events continues to climb every year, begging the question: Do you know your supply chain well enough to be prepared for the potential disruption caused by extreme weather?”[1] The current political attitude in Washington, DC, towards climate change doesn’t bode well for efforts to curb a worsening situation. The reduced effort to address the causes of climate change almost guarantees extreme weather events will remain near the top of supply chain risks in the decades ahead. Unfortunately, many companies seem to take the ostrich approach to such risks hoping they will simply go away rather than confronting them head on. “Companies know that climate change is relevant to their businesses,” write Bob Eccles (@rgeccles), a professor of management practice at Harvard Business School, and Lois Guthrie, founding director of the Climate Disclosure Standards Board. “If they don’t address it in corporate reports, however, it’s because corporate leaders don’t believe climate change is material to their business: Either they think the effects of climate change are beyond their planning horizon or it’s just not clear whether or how climate change might be a material business risk.”[2] Either way, burying one’s head in the sand is not a good risk management strategy.

What are the Risks?

Natural Disasters

Natural disasters are some of the first things that come to mind when people connect weather and supply chain risks. “It’s hard to predict where and when a tornado, hurricane, severe thunderstorm, or debilitating snowstorm will hit,” write Dunch and Sapin. What can be predicted is that such events are going to continue to plague supply chains. Tyler Moselle (@tyleranneliese) reports, “Between 2005 and 2014, the world averaged 335 annual natural disasters — a 14 percent increase from the prior decade. That’s double the recorded events during 1985 to 1994. No experts know the exact details of how climate change will impact the future, but higher instances of extreme weather and more weather-related disasters are certain. … Heightened risks of drought, tropical cyclones with higher wind speeds, wetter Asian monsoons, and possibly more intense mid-latitude storms are all possible consequences of global warming.”[3] For planning purposes, Dunch and Sapin do note, “In certain parts of the world these severe weather events occur more seasonally. With sufficient planning and decisiveness, financial losses and substantial reputational damage can be stemmed.”

Water Shortages

“Companies have come a long way in their ability to manage supply chain risk,” writes Alexis H. Bateman (@hickmana), Director of the MIT Responsible Supply Chain Lab, “but they urgently need to step up their efforts in one key area: water scarcity.”[4] She notes that the Carbon Disclosure Project’s (CDP) 2016 Annual Report of Corporate Water Disclosure, found more than a quarter of 607 respondents — which included some of the world’s largest global companies — “experienced detrimental impacts from water in 2016, and they expect more than half of the 4,416 water risks identified to materialize again over the next six years.” The monetary impacts of these water-related risks were estimated to be $14 billion in 2016, “a five-fold increase from 2015. Impacts include financial obligations to address groundwater pollution, capital costs to build power plants to replace declining sources of hydropower and water conservation efforts in the face of drought.”

Increasing Temperatures

Seth Borenstein (@borenbears) reports, “The United States is already setting twice as many daily heat records as cold records, but a new study predicts that will get a lot more lopsided as man-made climate change worsens.”[5] As noted above, the Trump administration has threatened to withdraw from the Paris protocol, which will only exacerbate an already deteriorating situation. Borenstein explains, “Under normal conditions, without extra heat-trapping gases from human activity, the nation should set about the same number of hot and cold records over the course of several years. But that’s not happening and it’s steadily getting worse, scientists said.”

What can Companies Do?

The first thing companies can do to help mitigate risks caused by climate change is to improve supply chain visibility. “Data and technology exists today that can help,” Dunch and Sapin explain. “It can be used to model potential disruptions to your supply chain so you can build plans in advance and speed your response. It can also be used to monitor your supply chain and alert you to potential and actual disruptions.” As they go on to note, too few companies have sufficient visibility. They report, “Nearly two-thirds of organizations still lack full visibility across their supply chains. As globalization and product complexity expands, supply chains continue to stretch into developing countries where labor and natural resources are plenty, but infrastructure is undeveloped or insufficient. Meanwhile, advanced planning and sourcing practices direct these extended supply chains to maximize efficiency and minimize costs to a point of fragility. Any disruption can result in organizations and consumers worldwide feeling the impact via loss of suppliers, delayed or destroyed goods, new product releases delays, and ultimately, customer dissatisfaction and brand damage.”

Visibility, however, is not sufficient. Dunch and Sapin noted that when they discussed the need for plans. Visibility provides an alert so that rapid actions can be taken; but, a plan details what those actions should be. Ryan Francis (@ryan4francis) insists companies failing to plan are planning to fail. He explains, “How organizations react after a … disaster should be clearly articulated in the plan.” Once a plan is developed it needs to be exercised. Learning on the job once a disruption hits is a surefire path to further disaster. Exercising plans can help identify potential vulnerabilities, which can be addressed before an adverse event occurs. In the area of water scarcity, for example, Bateman writes, “It’s important to engender a holistic view of this scarce resource. Many businesses can’t do without water — when supplies are restricted or unavailable, production slows or comes to a halt — so there needs to be a rethink of how water is valued within these corporations. Water’s ‘true’ value includes the production and supply chain costs associated with supply failures and quality issues at the plant level.” Much of what she writes can be applied to other areas of supply chain risk. A holistic view of the supply chain will help identify where and how climate-related risks pose a real threat.

Summary

Dunch and Sapin conclude, “In response to the increasing risk of extreme weather events and the growing impact on ever more global supply chains, organizations must confront the complexity of their supply chains now and open the aperture of visibility beyond their immediate vendors. Only when the company fully knows its supply chain and has invested in exposing its vulnerabilities can it adapt as needed to mitigate the impact of extreme weather events and maintain strength in the marketplace.” When it comes to adverse climate-related events, it’s a matter of “when” will they occur not “if” they will occur.

Footnotes
[1] Brian Dunch and David Sapin, “Supply Chain Risk: How prepared is your supply chain for the inevitable disruption caused by extreme weather?PwC Bits & Bytes, 2017.
[2] Bob Eccles and Lois Guthrie, “Defining ‘Material’ Climate Risks,” MIT Sloan Management Review, 16 March 2017.
[3] Tyler Moselle, “Supply Chain Risk Management and the Future of Natural Disasters,” Boss Magazine, March 2017.
[4] Alexis H. Bateman, “Does Your Supply Chain Strategy Hold Water?Longitudes, 6 February 2017.
[5] Seth Borenstein, “Get Used to Heat Records; Study Predicts Far More in Future,” R&D Magazine, 22 November 2016.
[6] Ryan Francis, “7 Tips for Developing a Powerful Data Disaster Plan,” IT News, 14 March 2017.

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