In Part 1 of this three-part series, I discussed the overall problem of predicted water shortages. In this post, I want to discuss the affect that water shortages can have on the supply chain. The most obvious impact perhaps is the affect that water shortages can have on agricultural (a subject touched upon in Part 1). Without enough water to raise crops, the world can go hungry. In this post, I want to look at some of the less obvious impacts that water use can have on the supply chain.
“Supply-chain professionals deal with all kinds of risks every day,” writes Jennifer Baljko, “from managing routine shipping delays to second-sourcing products when a natural disaster hits a key supplier. But there are a number of other global issues that should compel supply chain experts and corporate senior management teams to rethink their risks and their potential impact. One of them is the growing scarcity of stable water supplies.” [“Water Risks Impacting Supply Chains,” EBN, 7 February 2013] Baljko reports that “water shortage was named one of the top global risks for 2013” at the most recent World Economic Forum discussions in Davos, Switzerland. She continues:
“On a global scale, the industry uses 20 percent of water resources, notes the Cousteau Society. And as Bloomberg reported, without available, affordable, and clean water, companies could see disruptions, higher commodity costs, and reduced earnings. Given the data and growing awareness around this, it should come as no surprise that more watch groups are monitoring the world’s water situation and groups like the WEF and the Pacific Institute, the U.N.’s Global Compact CEO Water Mandate, are encouraging more government, local, and corporate involvement in monitoring and managing water-related risks.”
Baljko doesn’t offer any solutions to the conundrum she raises; but, she does ask some pretty good questions: “Will it escalate enough to become something supply chain managers will have to deal with fairly regularly? Will secondary sourcing strategies have to be put in place if factories located in water-risk areas run dry? Will teams of purchasers be dedicated to negotiating spot water prices the way they negotiate prices for gold or copper?” In the Bloomberg article referenced by Baljko, Andrew Steer reports, “CEOs increasingly recognize that water is essential for their business models and economic growth.” He added:
“More than half of the Global 500 companies that responded to the 2012 Carbon Disclosure Project Global Water Report cited ‘detrimental’ water-related impacts. These effects include property damage from drought or flooding, higher prices for water itself, poor water quality requiring on-site pre-treatment, and fines and litigation over pollution. According to the report, the associated costs for some companies ran as high as $200 million, up 38 percent from the previous year. … Water risks are increasingly compromising businesses. … In response, companies are realizing they need to work with governments and local communities to improve water management. Some industries are beginning to define water stewardship principles and water accounting standards. For example, 45 major companies representing hundreds of billions of dollars in revenue endorsed the U.N.’s Global Compact CEO Water Mandate, an initiative designed to help companies develop, implement and disclose water sustainability policies and practices.
The biggest threat is to companies whose current water usage is unsustainable. “Unsustainable water use is threatening agriculture, other business and populations in China, India and the US, according to a study by risk analysis company Maplecroft.” [“Excessive Water Use ‘Threatening Business in Major Economies’,” Environmental Leader, 11 May 2012] The article continues:
“The Water Stress Index calculates the water stress of over 168 countries by evaluating renewable supplies of water from precipitation, streams and rivers against domestic, industrial and agricultural use. The arid Middle East and North Africa region is the most at-risk region in the index, with Bahrain, Qatar, Kuwait, Libya, Djibouti, UAE, Yemen, Saudi Arabia, Oman and Egypt categorized as the 10 most water-stressed countries, listed in order of risk. However, the widespread use of irrigation for agriculture, combined with increasing domestic and industrial water demand in India (ranked 34th in the index), China (50) and the US (61) means that those economies’ water resources are coming under increasing pressure – and this may place more of an impact on the wider world, Maplecroft says.”
The greatest challenges for businesses are going to be in areas where their interests are in direct conflict with the interests of the community. “Companies … have for the most part made progress on managing water resources,” reports Suzanne Zweben. “Largely they recognize that access to water will be one of the greatest challenges of our time.” [“Behind the Brands: The Human Right to Water AND Supply Chain Responsibility,” Oxfam America, 18 March 2013] Zweben continues:
“It’s projected that by 2025, just 12 years away, that 1.8 billion people will be living in countries or regions with absolute water scarcity. Two-thirds of the world’s population is expected to have limited access to clean water. This is one sustainability issue food and beverage companies grasp as core to their business; it will impact their ability to make products and touch the lives of their employees, consumers and the communities where they operate and from which they source.”
In addition to physical risks associated with water (such as, not having access to enough water to operate), there are also reputational risks. Organizations, like Oxfam, are now ranking companies with respect to how well they manage water resources. Of Oxfam’s so-called “Big Ten companies,” none were given a good score (although Nestle came close). Below is how Oxfam assessed three main aspects of its scorecard relating to water.
(1) Human Right to Water: Has the company recognized the human right to water as defined by the UN? Has the company committed to consult communities on plans to develop water resources, i.e., before a project has started? Have grievance mechanisms been established in cases where water rights have been violated? (A recent report by The Special Rapporteur on the human right to safe drinking water and sanitation, On the Right Track, addresses good practices in implementing the human right to water. See Chapter 3 especially.)
(2) Transparency: Does the company disclose information on water withdrawals, discharges (i.e., the quality of water released into lakes and rivers), water-stressed regions where the company has operations, regions where the company operates that are at risk for water stress, and raw materials that come from regions subject to water-related risk? (Seven of the ten companies companies assessed through the Behind the Brands scorecard disclose information through the Water Program of the Carbon Disclosure Project.)
(3) Supply Chain Management: Does the company require its suppliers to report on their water use, risks and management? Are requirements on water rights and use specified in a company’s supplier code? Has the company set a specific target to reduce its water use along its whole value chain?
Zweben reports that “food and beverage companies have played a central role in the CEO Water Mandate … yet no one company has taken significant steps on both the human right to water and supply chain management.” Ramit Plushnick-Masti predicts that self-interest will keep beverage companies, in particular, involved in water conservation and best practice programs. [“Beverage Companies Pay Millions To Conserve Water,” Manufacturing.net, 8 August 2012] He writes, “For Dr. Pepper and other beverage companies engaged in similar work, the impetus is their bottom line — conserving water guarantees long-term access to the most crucial ingredient in their products.” He continues:
“The biggest players — from Coca-Cola and Pepsi Co. to Miller and MolsonCoors — as well as smaller, regional beverage companies list water as a risk in long-term plans. In 2006, 18 companies created an alliance called the Beverage Industry Environmental Roundtable to tackle water, energy and other issues that could affect the industry’s growth. There is no total available for how much has been invested in water conservation projects in the past five years, but experts believe it’s more than $500 million dollars. Thomas Lyon, a professor at the University of Michigan who researches connections between industry and the environment, said three factors have pushed beverage companies to conserve water: future markets in developing countries don’t drink enough soft drinks, from their perspective; the impacts of climate change are starting to become more apparent; and some of the countries targeted for growth are the same ones experts believe will be most affected by climate change.”
With Asia predicted to be the focus of the global economy in the decades ahead, experts are concerned that water issues could have significant impacts in that region. [“Supply Chains in Asia Run High Risk of Water Shortages, Study Finds,” by KPMG, SupplyChainBrain, 5 April 2012] The article notes:
“Of the sectors with the highest levels of water use, the share consumed by suppliers is greatest for food & beverage, personal & household goods and automobiles & parts companies. They could be affected by pressure on water resources through water pricing or scarcity driving up commodities costs. Companies are at the starting blocks of understanding financial risks and opportunities from water-related challenges in operations and supply chains. Companies that assess water risks will be well placed to strengthen water management strategies, secure supplies and stabilise input costs.”
If all that is not enough for companies to worry about, Jonas Kron, an investment advisor at Trillium Asset Management, told Bloomberg “that he thinks the world’s dwindling supply of fresh water may soon impact results at the companies the fund invests in.” [“Water Risks Becoming Investor Concerns, as New Interactice Tool Helps Companies Assess their Own Risk Levels,” The Green Supply Chain, 11 January 2012] In other words, if companies don’t manage water resources better, they may find access to investment capital difficult to find.
The bottom line is that potential water shortages are going to affect private and public organizations as well as individuals. The problem is international in scale and will require widespread private/public partnerships to address it. In the final segment of this series, I’ll look at some technological breakthroughs as well as some strategies that have been recommended for dealing with water challenges.