Preparing Supply Chains for Climate Change: Top Risks and Strategies for Adaptation
On Nov. 23, the Trump administration released the findings of the fourth National Climate Assessment, which detailed a dire set of predictions for U.S. businesses over the next several decades.
In addition to the headline statistic projecting that the U.S. economy will shrink 10% by the year 2100 due to effects from climate change, the report, which was compiled by leading climate scientists and 13 federal agencies, warned that numerous facets of global supply chains are at risk for disruption. These include not only common problems from natural disasters such as wildfires and hurricanes but also breakdowns in critical logistics infrastructure, geographic shifts in resource availability and volatility in global trading relationships, to name a few.
The report paints a bleak picture, but it also offers several takeaways that can help businesses get a grip on how to understand the supply chain risks of climate change and begin addressing them. Key among these is the suggestion that material, facility and logistics planning will all need to begin adapting today to effectively tackle climate change-related effects in the near and long terms.
To help you get started, here are the top three areas that procurement and supply chain organizations should examine when assessing the risks that climate change poses to their supply chains, as well as the NCA report’s key recommendations about how to address them today.
The Risks: 3 Areas to Examine
Climate change can appear to be an intractable, long-term problem. But many of the worst-case scenarios are starting to show their effects. Most visible are disruptions to critical infrastructure (like ports, roads, rail), resource constraints, and potential for social or political strife.
First, the infrastructure that corporate supply chains rely on to acquire and move goods will begin to experience significant strain. Ports, for example, are at risk for the effects of “land sinking” and flooding, since most critical U.S. shipping hubs are built in low-lying areas, thus exposing them to rising sea levels. Since ports serve as the gateway for 99% of overseas U.S. trade, according to the report, supply chains will become particularly vulnerable to climate impacts from extreme weather events associated with rising sea levels and tropical storm activity.
And even if goods manage to make it past ports, getting them to production or distribution facilities will also become more challenging. Rising temperatures are expected to cause asphalt to wear and deteriorate faster, as well as buckle rail lines, the report explains. Rebuilding busy transportation routes is expected to cost governments significant amounts of money, and in cases where the logistics lanes are privately owned, corporations may opt to simply leave the routes unrepaired.
Such was the case when OmniTRAX, a Denver-based railroad company, said it could not justify repairing tracks connecting Churchill, Manitoba, to the rest of the province after floods washed away a critical link in the railroad, as the New York Times reported. Such situations are expected to become more common as temperatures rise and flooding worsens, creating considerable logistical challenges for supply chains.
These same conditions are expected to severely reduce crop yields and create water shortages, placing significant constraints on resource availability, particularly in the food industry.
“Climate projections to the year 2100 suggest that increases are expected in the incidence of drought and elevated growing-season temperatures,” according the NCA report. “Elevated temperatures play a critical role in increasing the rate of drought onset, overall drought intensity and drought impact through altered water availability and demand. Increased evaporation rates caused by high temperatures, in association with drought, will exacerbate plant stress, yield reduction, fire risks, and depletion of surface and groundwater resources.”
Agricultural supply chains have already begun facing the consequences of such conditions. The 2012 U.S. drought, for example, which caused more than two-thirds of counties to declare themselves as disaster areas, significantly reduced yields for livestock, wheat, corn and soybean production in the Great Plains and Midwest. The federal crop insurance program had to pay out $14.5 billion in loss payments as a result.
Considering that nonfarming agriculture-related sectors in the food supply chain contributed to $855 billion of U.S. GDP (as of 2015), a substantial amount of revenue remains at risk without supply chain mitigation strategies that account for climate change effects on crop yields.
Finally, the same forces that are expected to strain food supply chains are expected to create social strife and political conflict. In particular, climate change increases risks to national security through direct impacts on U.S. military infrastructure, according to the report, and by affecting factors like food and water availability that can exacerbate conflict outside U.S. borders.
“Direct linkages between climate-related stress and conflict are unclear, but climate variability has been shown to affect conflict through intermediate processes, including resource competition, commodity price shocks, and food insecurity,” the report states. Researchers have already linked these factors to events such as the 2011 Egyptian revolution and human migration away from equatorial regions generally.
Because areas of vulnerability are being identified in advance, however, some companies are laying the groundwork now to increase future resiliency. Coca-Cola, for example, is working with the World Wildlife Fund to protect foreign watersheds that Coca-Cola uses for water supply. Coca-Cola was able to increase its company-wide water efficiency from 2004 to 2012 by 21.4%, according to the report, which avoided about $600 million in costs and tended to increase resilience in the face of water shortages.
Key Takeaway: Plan for Adaptation Actions
As the above examples make clear, reducing supply chain risks presented by climate changes is not a long-term thought experiment but an imperative that must be addressed today. While much of the popular discussion around climate change focuses on reducing risks through emissions mitigation, from a supply chain planning perspective, reducing risk through adaptation actions is also an essential consideration.
As the report defines it, adaptation consists of “the actions taken at the individual, local, regional and national levels to reduce risks from even today’s changed climate conditions and to prepare for impacts from additional changes projected for the future.” And while that definition encompasses a range of potential actions, homing in on what that means for supply chains could have significant payoffs: Adaptation can reduce by more than half the cost of climate impacts in some sectors, according to the report.
Part of this payoff comes because the benefits of proactive adaptation exceed the costs of preparation. Proactive adaptation initiatives — including changes to policies, business operations and capital investments — have been proven to yield benefits in excess to their total costs both in the near term and the long term, the report found in one its key takeaways for adaptation strategies.
Determining just where to focus on adaptation initiatives, however, is easier said than done. That’s because all but the most expertly managed supply chains have been fully mapped below the first tier.
The fastest way to get a handle on supply chain visibility is to enlist the help of a software provider that specializes in this area. Resilinc’s RiskShield product, for example, enables procurement organizations to visualize their end-to-end supply chains through geographic maps and network graphs. By loading supplier and purchase data into a centralized platform, RiskShield consolidates supply chain data (e.g., part-site mapping, recovery times, alternate sites, risk assessment surveys) from not only tier 1 suppliers but also suppliers several tiers below. This allows companies to consolidate siloed corporate data, creating a single version of the truth about a business’ risk exposure to climate-related effects.
Last, the report recommends that organizations reframe their idea of adaptation from a one-time effort to an iterative process. Adaptation requires a continuous risk management process without an end point. In this framework, organizations assess risks and vulnerabilities from climate change (and, to be sure, other areas, including economic, environmental and social risks), take actions to prevent or mitigate those risks, and improve over time.
This, of course, requires procurement to constantly monitor numerous information sources to proactively identify potential supply chain disruptions. Services like Resilinc’s EventWatch platform use artificial intelligence to monitor any events that could affect supply chains and predict how an event could impact suppliers and sites. Resilinc tracks millions of sources — from news sites to social media and regulatory agencies — to give users the earliest notice possible, providing up-to-date guidance as events evolve, which is critical for the era of climate change adaptation that procurement faces.
This article was written on behalf of Resilinc by the Spend Matters Brand Studio team, not as Spend Matters editorial content or PRO analysis.
CLM EPRO P2P SOURCING ANALYTICS06/27/2019
CLM EPRO P2P SOURCING ANALYTICS06/27/2019