Stormy Weather: Supply Chain Risk Management and Climate Change

Stephen DeAngelis

April 14, 2016

“The El Niño phenomenon,” writes Erica E. Phillips (@EEPhillips_WSJ), “is behind extreme weather patterns seen from India to Panama. With the effects, ranging from heavy rains to severe drought, expected to last for months, companies are reprogramming their supply chains to ensure they can handle whatever storms come their way.”[1] Of course, the El Niño phenomenon doesn’t occur every year; but, climate change comes in many guises and will continue to affect how companies implement their supply chain risk management processes. Evan Puzey, Chief Operations Officer at Kewill Asia Pacific, notes, “With major meteorological events like El Niño in the forecast, … the weather is becoming top-of-mind — particularly with supply chain and transportation experts. Significant weather events pose a threat to normal crop production and could also disrupt the movement of goods if roads are shut down or there is weather-related gridlock.”[2] Perhaps the greatest climate change risk facing businesses is the future availability of water resources. Cate Lamb (@Cate_Lamb), head of water at CDP, told Christopher P. Skroupa, “Over the past year, water challenges have made headlines. In January, the World Economic Forum ranked water as the biggest threat facing the world over the next decade.”[3]

 

Companies can longer afford to ignore the potential risks associated with climate change. “Although the vast majority of scientists and leaders worldwide agree on the stakes,” writes Marshall Burke (@MarshallBBurke), an Assistant Professor of Earth System Science at Stanford University, “new research shows that addressing climate change may be even more important than previously thought, at least from an economic perspective.”[4] He continues:

“While the impacts of rising temperatures on building blocks of the economy — such as agricultural output and worker productivity, are increasingly well documented — the effects of temperature on overall economic productivity remain poorly understood. In research that I co-authored with Sol Hsiang and Ted Miguel of the University of California, Berkeley, we provide the first evidence that the global economy is linked to global climate change at a macro scale. Our findings suggest that, unmitigated, climate change could reduce global GDP by over 20 percent by 2100 – a number roughly 5-10 times larger than current estimates.”

You obviously don’t need a supply chain risk management process to know that a 20 percent reduction in global GDP would be bad for business. No single company or industry can single-handedly address the challenges presented by climate change; but, if every company does its part, the seriousness of the challenge ahead can be mitigated. Is your supply chain risk management team taking the long view as well as the short view when it comes to addressing risks? It should. Srini Vasan, CEO of eShipGlobal, writes, “Staying ahead of potential risks before they become real threats is merely part of the deal when you run a business, but what about those factors that you can’t anticipate — much less control? For example, how does a successful business prepare for or even begin to respond to factors that can disrupt the production of essential raw materials such as agriculture, fuel or mining and metals commodities? By knocking out this first essential step, the entire supply chain collapses before it’s even fully formed.”[5] He recommends five things a company can do right now to help mitigate future risks:

 

1. Adopt a culture of awareness and full understanding.
2. Assess your risks.
3. Establish stable relationships.
4. Support community development and environmental sustainability.
5. Collaborate as an international community.

 

Unlike some disruptive events, Kai Goerlich (@KaiGoe), the Idea Director of Thought Leadership at SAP, notes, “Extreme weather events send long-lasting ripples through the supply chain.”[6] Goerlich suggests eight substantive steps that companies can take to deal with climate change issues:

 

1. Build up a risk assessment of your supply chain by identifying concentrations, dependencies, and potential bottlenecks in production and logistics.
2. Identify resource and product substitutes across your supply chain.
3. Enhance the reaction time of your supplier network for fast onboarding of suppliers based on local needs or disruptions.
4. Identify alternative routing and logistic providers.
5. Setup a digitized, real-time stock management and logistics system using IoT and real-time positioning that enables you to source with high flexibility and resilience.
6. Use historical weather and sales data to learn from past disruptions and recurring consumer demands.
7. Forecast demand in real time to sense and react to potential disruptions and short-term changes.
8. Track your customers across channels and respond in real time with weather and location-relevant offerings.

 

Of course, the more the climate changes the less reliable historical weather patterns become. There are other steps that can be taken specific to water risks. As Jessica Lyons Hardcastle observes, “Water has a place on the risk agenda for every business, either as a direct operational issue or in the supply chain.”[7] She recommends understanding “the different types of water-related issues” that can affect a business, including: operational risks, regulatory risks, and reputational risks. She also recommends that companies evaluate the impact of water to their bottom line. Factors involved in that calculation should include the cost of obtaining water, transportation, water treatment, and discharge costs. She notes, however, that there are also “opportunities and value creation associated with water risk.” She lists seven tactical things a company can do to mitigate water risks that were put together by PwC’s Lauren Koopman. They are:

 

  • Provide, and properly maintain, drinking water, sanitation and hygiene services in the workplace for the health and well-being of a company’s workers.
  • Measure and monitor water management practices. Track the extent to which direct operations use and affect water resources.
  • Drive operational efficiency and reduce pollution. Implement water efficiency and pollution reduction measures that improve performance and begin to manage risks and negative impacts.
  • Identify and understand water-stressed and high-risk basins. Identify and investigate those areas that are experiencing water stress or are considered high-risk.
  • Integrate water management into business strategy. Think strategically about developing policies and programs to address top water priorities.
  • Leverage improved practices throughout the value chain. Address water risks and negative impacts in the value chain.
  • Advance sustainable water management and engage in collective action — engage externally to ensure long-term business continuity by contributing to the sustainable management of shared water resources on which the company relies.

 

Professor Burke concludes, “The implications of not acting are troubling. If societies continue to function as they have in the recent past, climate change will likely reshape the global economy by substantially reducing global economic output and possibly amplifying existing global economic inequalities, relative to a world without climate change.” Socially-responsible companies want to be part of the solution not part of the problem. A good supply change risk management team can help them do just that.

 

Footnotes
[1] Erica E. Phillips, “5 Ways Companies Can Prepare Their Supply Chains for El Niño,” The Wall Street Journal, 9 September 2015.
[2] Evan Puzey, “Ensure Your Supply Chain Can Weather the Storm,” EBN, 12 November 2015.
[3] Christopher P. Skroupa, “Mitigating Water Risk: The Business Impact,” Forbes, 23 February 2016.
[4] Marshall Burke, “The global economic costs from climate change may be worse than expected,” The Brookings Institute, 9 December 2015.
[5] Srini Vasan, “Supply Chain Managers: What You Need to Know About Climate Change,” TriplePundit, 7 November 2014.
[6] Kai Goerlich, “8 Steps To A More Weatherproof Supply Chain,” D!gitalist Magazine, 23 February 2016.
[7] Jessica Lyons Hardcastle, “How to Best Manage Corporate Water Risk,” Environmental Leader, 29 February 2016.