Laura Bowler
September 10, 2023
Protecting supply chain operations in the face of climate change
A lack of consideration for climate change's impact on supply chain operations could have significant future consequences. In this article, our experts share some steps to begin incorporating risk mitigation considerations into supply chain operations.
Climate-related disruptions are projected to intensify in coming years as the globe continues to warm. While climate change impacts all aspects of society, the impacts can be particularly impactful to global supply chains, which play a critical role in providing vital products and services to people. Climate change can impact supply chains in two key ways:
- Climate change brings more intense, severe, and long-lasting severe weather events such as hurricanes, floods, droughts, freezes, and wildfires. These events can damage key facilities, disrupt travel, cut off key resources or products, etc. For example: Flooding in China generated a massive blow to global supply chain operations. On the Chinese food supply chain, ramifications included 2.5 million acres of crop fields being impacted, resulting in damage of 2.25 billion yuan (US $348 million). China's estimated economic losses from flood-related events are $25 billion.
- Climate change also results in rising sea levels. This disrupts coastal infrastructure, which is highly utilized by global supply chains. For example: Ports enable global and local commerce and fulfill a diverse set of functions for the economy. Rising sea levels are inundating ports and causing increased flooding, creating more risk for supply chains. Climate risk is estimated to cause $7.6 billion in losses for ports each year.
These disruptions in the supply chain interrupt manufacturing, production, and delivery of goods, raising costs of materials and prices of products and hurting corporate revenues. With climate change posing such imminent risks of disruptions, supply chains must begin preparing to become resilient and climate adaptive.
To mitigate the risk of supply chain disruptions due to climate change, company should follow these four steps:
- Map the supply chain
- Conduct a climate change risk assessment
- Develop a strategy to address the risks
- Implement, monitor, and update
Let’s dive into each of these in a bit more detail.
Step 1: Map the Supply Chain
Mapping is a useful tool for gaining insight into the dynamics and relationships within a supply chain. Mapping includes:
- Identifying all stakeholders and every unit that plays a role in the supply chain
- Understanding each supplier relationship and how it fits into the bigger picture, including how many other supply chains (if any) they are involved in
- Determining the costs and time frames associated with each element in the supply chain
- Tracking the flow of information through the supply chain
For example, a company using agricultural products might start with chart of every process that goes into the production of those products, including farming, packaging, and transport. Then, the company add locations to that chart – where is each process taking place? Finally, the company can add costs and time frames to each step – how much time does it take for the product to complete a stage and what are the costs to the company? This overall map allows a company to assess how diverse or narrow their supply chain is and where the biggest time and resource constraints are.
At the end of the mapping exercise, companies will understand the complexity of their supply chains and be able to identify all points where they should conduct a risk assessment.
Step 2: Climate Change Risk Assessment
A climate change risk assessment allows companies to identify the likelihood of future climate-based disruptions and their potential impacts. This assessment typically includes three key components:
- Identifying both present-day and future (potential) risks related to climate change
- Evaluating the supply chain (as mapped in step 1) to understand its vulnerability to these risks and what the potential consequences of these risks might be
- Quantifying and ranking the risks to determine which parts of the supply chain require the most attention
For example, the company that previously mapped out the supply chain for their agricultural products could begin with assessing risk for each node in their map. This would include reviewing the area’s demographic, socio-economic and environmental characteristics to understand what potential climate impacts are relevant for the area. This also includes assessing past climatic events, including the frequency at which they have occurred, and the severity of damage caused.
For each node, the company would then assess the risk of an interruption, including:
- What is the likelihood of the interruption?
- What is the impact on the company when a disruption occurs (higher production costs, loss of product, loss of revenue)?
- How much time it will take to recover after an interruption occurs?
By mapping out all of these risks, supply chain operation managers will have a clearer picture of the entire supply chain from start to end and be more able to make shifts in operations where necessary to mitigate vulnerabilities and create resilient operations.
Step 3: Develop a strategy to address risks
After understanding the supply chain and its exposure to climate change risk, companies need to focus on creating systems to mitigate these risks. This step will be unique to each supply chain, depending on the risks identified in step 2, but examples risk mitigation actions could include:
- Strengthen current critical supplier relationships: Ensure key suppliers continue supplying products by strengthening relationships, working collaboratively with suppliers, and providing incentives, such as long-term contracts
- Increase inventory: Where possible and practical, carry and store sufficient inventory of supplies to be able to withstand a supply disruption
- Diversify supplier base and/or nearshore: Utilize multiple suppliers for the same material to minimize vulnerabilities from one supplier faces disruptions. In addition, move supply chains closer to home where possible (i.e., nearshoring) to reduce global and cross-country dependencies and shorten transit times
In addition, companies may want to implement strategies that improve their awareness of risks, giving companies time to react to disruptions sooner. This could include:
- Integrate technology: Predictive analytics can identify patterns and trends that enable companies to anticipate and mitigate risks before they occur
- Map secondary supply chains: Mapping out the geographic locations of critical suppliers, how products and/or services are being produced and by whom enables greater visibility and produces a detailed visualization of the entire supply chain, beyond tier one, allows for greater risk assessment and preparation
For more on developing this strategy, check out our previous article “Protecting your business through supply chain management.”
Step 4: Implement, monitor and update
After developing a strategy, companies will need to implement it. Key business leaders and environmental health experts should collaborate to create an action plan and communicate it throughout the company, enabling the facilitation of investments in real solutions to mitigate risks that are companywide. These action plans will likely include:
- New processes – New strategies may drive changes in operations, which need to be defined and shared with key stakeholders
- New roles and responsibilities – These processes may require collaboration across company structures and new roles and responsibilities
- Integrated technology – Using a risk assessment software system, such as one offering predictive analytics, can help track risks and resiliency more efficiently
After execution, companies will need to constantly monitor new and evolving risks and update their strategy/systems in place. Predictive analytics has a strong role to play in this step by allowing companies to use current data to forecast future events and trends. Further, companies could consider dedicating a position under the supply chain operations team committed to tracking these trends and improving systems as needed.
Climate change is already impacting supply chains and overall economic growth, and the threat is projected to grow. The cost of producing, transporting, and delivering essential goods through international waters will increase as risks increase alongside consumer demand.
In addition, challenging weather conditions will impact delivery times, transportation routes, and onsite productions. Companies must expand their understanding of risk to factor in the location, type and timing of a threat and realize the imminent issue of climate change.
Understanding how all these factors play into the supply chain and how they are interrupted by extreme weather will shorten a company's response time and make them more resilient to disruptions.
Implementing strategies to reduce risk and enhance resiliency will allow companies to take a proactive approach to addressing supply chain vulnerabilities and become more able to withstand forthcoming risks without significant operational disruptions.
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Laura Bowler
Manager
+1 734-890-6226