Climate Change becomes a Priority for Supply Chain Risk Managers
July 15, 2014
“In 2010,” writes Ryan Schuchard (@ryanschuchard), “massive flooding in Pakistan profoundly affected the country and disrupted supply chains globally, spiking international prices for cotton, rice and wheat. This was only one in a string of weather disasters — including heat waves, hurricanes and wildfires — that have affected supply chains on a large scale in the past decade.” [“3 ways companies can identify climate risks in supply chains,” GreenBiz, 25 June 2014] Climate-related impacts aren’t limited to unexpected short-term events. The ongoing drought in California is predicted to raise the price for some fruits and vegetables as much as 6 percent this year. Sian Harris adds, “As extreme weather impacts global supply chains, industries must keep resources moving. Be it the flow of goods, electricity, communications or oil and gas, today’s governments, global manufacturers, aid relief organisations and insurance firms are worried sick over supply chain disruptions. And it’s easy to see why.” [“Climate change: can supply chains take the strain?” Engineering and Technology Magazine, 19 May 2014] I’m not sure that all business leaders are “worried sick,” but they are well aware of the risks. Joyce Coffee, managing director of the Notre Dame Global Adaptation Index, notes, “A supply-chain report from CDP, the global nonprofit that measures vital environmental information, indicates that 73 percent of executives surveyed now see physical risks from climate change disrupting their supply chain.” [“Supply Chains in the Face of a Changing Climate,” Environmental Leader, 30 April 2014]
Perhaps the greatest risk associated with long-term climate change is how it is going to affect water availability. We’ve all seen before and after pictures of melting glaciers upon which some populations rely for their water. And we’ve read about drought conditions in the western United States and how farmers, businesses, and towns are facing water restrictions. In an interview, William Sarni (@WillSarni), director and Enterprise Water Strategy Practice Leader at Deloitte Consulting LLP, was asked five questions concerning how the availability of water could impact businesses. [“Five questions on business risks related to water and other critical resources,” Risk Angles] The introduction to Sarni’s interview states, “Water is something most of us take for granted. However, as demand for water continues to rise, more and more companies are learning that water is a finite resource and that water scarcity may have a big impact on the bottom line. In some cases it can even threaten a company’s ability to operate, as well as its reputation.” Sarni was first asked, “What does water have to do with business risk?” He responded:
“Without water it is virtually impossible for businesses to do anything. Food and beverage companies face the most obvious challenges — but they’re not alone. In India and the U.S., for example, leading beverage companies have had their operating licenses threatened or even revoked because their water usage directly conflicted with the needs of the public. Other industries that rely heavily on cheap plentiful water include apparel, utilities, energy, technology, and manufacturing. Also, for some sectors water is a critical resource for product manufacturing and product use. As a result there is increased focus on agricultural supply chains and consumer products such as personal care and cleaning.”
In a follow-on question, Sarni was asked, “What are the risks of ignoring the problem?” He responded:
“The business risks associated with water fall into three broad categories:
- Operational. Not having enough clean, affordable water — when and where you need it — to run your factories and business.
- Regulatory. Current and future laws and regulations that affect the availability and price of water.
- Reputational. The positive or negative brand impact that stems from how your business uses and manages water.”
Sarni went on to note that water scarcity is a global problem. Chris Park, principal, Deloitte Consulting LLP and leader in the area of Enterprise Sustainability, added, “Water scarcity is part of a larger risk management challenge that includes other critical resources such as energy and materials. These risks — along with broader business issues such as sustainability — can have a significant impact on shareholder value and the bottom line.” The fact that risks associated with climate change are global creates one of those situations in which everybody’s problem is nobody’s problem (i.e., there is no single organization that can address climate change). Schuchard remarks, “Despite the enormous value at stake, climate risks in supply chains can be hard to see because they are so large.” He reports that the CEO of Acclimatise, John Firth, told participants at the BSR Spring Forum that the best way “for managers to address supply chain climate risks” is to assess them “in terms of existing stressors — such as procurement costs, on-time delivery, water availability and secure energy and infrastructure.” Schuchard reports that other speakers at the Forum “identified three lenses that can help company managers connect climate change to existing supply chain concerns.” The first lens is geographic. They recommended identifying vulnerable regions. Schuchard explains:
“The economic costs of climate-related disasters are rising, in large part because business is consolidating in vulnerable regions in the name of market growth and efficiency. It is projected that by 2070, seven of the 10 largest economic hubs will be in the developing world, and assets exposed to floods will rise from 5 percent to 9 percent of global GDP. The good news is that most companies have processes in place to help managers think about economic and sociopolitical risks in emerging regions. Managers responsible for understanding local risk should consider how weather and environmental changes will create more stress on vulnerabilities they are already addressing, such as on the price and availability of crops, continuity of logistics and safety and security of operations.”
The second lens that Schuchard recommends supply chain risk managers using involves categorizing risks. He explains:
“Sustainability professionals also can address climate risk through global supply or procurement categories that are dependent on stable climatic conditions, such as crops, capital-intensive infrastructure and water-intensive operations. … Climate impacts on product categories can have global domino effects. Pakistan’s 2010 floods caused rice production to fall, increasing crop prices. This prompted consumers to buy wheat, which increased the price of that commodity, and, in turn, the price of cookies in the U.K. In addition to identifying categories that are directly exposed, managers should think about the impacts caused by changes in the markets of substitutes.”
The final lens identified by Schuchard involves identifying things that could destabilize sustainability efforts. He writes:
“Climate change undermines companies’ ability to address material sustainability issues. Many companies are working to improve economic development in the communities in which they operate, yet climate impacts, especially disasters, can depress job markets for years. Or, while it is typical for companies to commit to reducing greenhouse gas emissions, the lower water runoff associated with droughts can reduce the capacity of hydropower, the most mature source of renewable power. Therefore, a third lens for adapting supply chains to climate change is considering how weather disruption and ecological change can affect existing strategies for sustainability.”
In articles about innovation and creativity, I have often touted the benefits of looking at challenges from a number of different perspectives. Schuchard’s three lenses help risk managers do just that. Park recommends that companies “expect the unexpected” and “scrutinize risk across the entire supply chain.” Supply chain mapping is one technique that can help you do the latter. Some mapping efforts are extremely ambitious. Harris reports, for example, that Anders Levermann (@ALevermann), Professor of Dynamics of Climate Systems at the Germany-based Potsdam Institute for Climate Impact Research, is working with a team that wants to model “the impact of climate change and extreme events on the complex flows of materials, energy and communications” around the world. To aid in this effort, Levermann and his colleagues “unveiled a website called Zeean (www.zeean.net). Described as ‘a community effort to generate a heterogeneous open-source database of the global economic network at high regional and sectoral detail’, the website hosts data on global supply chains so users can visualise and analyse supply chains and risks.” Coffee concludes:
“What’s clear is that each new catastrophic storm event will bring new calls to action for more data to help inform the private sector on how best to prepare for — or better yet prevent — supply chain disruptions when the ‘next’ storm comes along. We have entered a new era where adaptive management of climate risks will play an increasingly important role in board rooms and C-suite offices across the globe — particularly for multinationals with extensive supply chains exposure in the most vulnerable places.”
Big data analytics will obviously play a role in understanding climate change, how it can affect supply chains, and what can be done to mitigate its consequences. Some politicians might want to ignore the realities of climate change, but business leaders can’t.