Zoom in on Natural Disaster Risk
11/06/2024
When we refer to natural disaster risk, we are talking about ‘unavoidable’ risk — albeit ‘mitigatable’ — that affects a supplier’s business. The natural occurrence, such as a hurricane, earthquake, fire or a pandemic, affects a supplier’s business which in turn affects its customers or end users causing a knock-on effect down the supply chain.
Natural disasters include several types of events:
· Meteorological: severe weather events like hurricanes, cyclones, storms, tornadoes and blizzards
· Climatological: long-term weather patterns, such as droughts, extreme temperatures (heatwaves or cold snaps) and wildfires
· Hydrological: floods, landslides, avalanches and tsunamis
· Geophysical: earthquakes, volcanic eruptions and tsunamis
· Biological: epidemics, pandemics, pest infestations, etc.
Covid-19 created its share of disruptions, and as the World Economic Forum’s Global Risks Report 2024 highlighted, extreme weather is the number-one ranked risk for this year and number two in the next two years (behind misinformation and disinformation). Looking even further, in 10 years’ time, the WEF’s top four risks are all related to environmental aspects that can be classified as natural disasters:
· Extreme weather events
· Critical change to Earth systems
· Biodiversity loss and ecosystem collapse
· Natural resource shortages
This is because climate-related changes and risks are on a very different scale (scope, timeline, impact, etc.) when compared to other natural disasters. And the news is full of stories highlighting the consequences of rainfalls, droughts, extreme temperature, etc. on people and businesses.
What causes natural risk
Natural risk events occur ‘naturally,’ without a direct human driver or cause. Even though a business could choose not to manufacture on a geological fault-line or flood plain, the direct trigger for the risk is still not the result of human interaction. So these risks cannot be completely avoided or mitigated. Because some natural drivers are known about, thanks to timely and relevant data from the systems available today, buyers can take some precautions. For example, they can obtain and study this data before selecting a supplier. If the choice is limited owing to regional preferences or constraints, then certainly these drivers should be reflected in any contracts. Businesses can also take appropriate action should a risk event occur.
How natural risk affects your business
Natural risk can affect businesses in various ways, with outcomes ranging from simple inconvenience to outright ruination.
- Interruption of supply: Natural disaster affecting a supplier’s (or its supplier’s) factory, warehouse, transportation link or other can have short- or long-term effects on the buyer in terms of supply interruption.
- Loss of short-term sales: Supply interruptions can lead to production shortfalls or complete shut-downs, which ultimately drives a loss in sales and profit.
- Finding new sources of supply: Securing alternative sources of supply from unaffected suppliers is time-consuming and not without risk. All buyers that have been affected will be looking for the same alternative sources, making the marketplace very crowded, and the need to verify, approve and onboard new suppliers quickly brings challenges for all parties.
- Changes in the marketplace: In the case of an extreme natural event, suppliers will likely be operating at reduced capacity, if at all for a while. Some suppliers don’t make it through at all. This changes the dynamics of the marketplace and can put the alternative or surviving suppliers in a more powerful position to negotiate to the detriment of buyers.
How to mitigate natural risk
The simple fact that these are naturally occurring events means that this risk is unavoidable, but that doesn’t mean businesses can’t take steps to reduce their impact.
First of all, businesses should carefully analyze the potential for risks, such as flooding and extreme weather conditions based on supplier location. Trusted third-party data, and there are many solution providers to consider for this, can be invaluable. For business-critical products or services this location-focused knowledge helps the buyer achieve a better spread of supply. It’s worth considering that for an excellent and trusted supplier, the buyer may weigh up the risk versus the preferred supplier and choose to accept it. But it would be wise to ensure the alternative supplier is not located in the same region. Of course insuring against such events is also an option.
Speed with which you respond to an event is also critical. When an event hits a particular location or individual business, mitigating the full effects is very much down to how a) quickly the supplying firm communicates the event and b) how effectively the customers of that supply respond. It might involve the customer securing preferential supply from the affected supplier, or it might mean contacting alternative suppliers, existing or new, to obtain and secure supply (which will likely become tight very quickly, so speed is of the essence).
It’s important to put risk plans in place that identify in advance the various options for each vulnerable supplier. Market intelligence and risk management tools can help buyers respond more quickly and more effectively than their competition.
Conclusion
Natural disasters are a major category of supply chain risk, and that risk appears to be increasing with global climate change. While such risks cannot be avoided completely, there are sensible actions that buyers can take, like understanding in advance the likelihood of a supplier being at risk, owing to location and getting the earliest possible warnings or alerts so that a contingency plan can be made quickly. Time (and of course data) is very much the key to mitigation once an event occurs.
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