Climate change an ill wind for supply chain risk management

Climate change is an ever-increasing threat, with extreme weather events hitting supply chains with greater frequency. Here, we look at mitigating risks

For those who manage risk in supply chains, climate change is becoming a weightier problem by the minute. A recent major study of 12,000 suppliers in the United States, China and Taiwan measured climate-related risks being faced by around 100 original equipment manufacturers (OEMs) in the high-tech, auto and consumer goods industries. 

The Harvard Business Review study suggests just 11% of suppliers are fully prepared for weather-related disruption. The study also found half (49%) of the surveyed US companies had experienced an increase in climate volatility, with this figure jumping in China and Taiwan to a massive 93%.

The reality is that as climate change worsens, we will face more-frequent and severe extreme weather events, including hurricanes, tsunamis, forest fires, and floods. Inevitably, these will interrupt production, increase sourcing costs, and cut into corporate revenue. 

Take hurricanes – or typhoons, as they are known in South East Asia: these are among the most frequent extreme-weather events and can be particularly devastating. As a 2020 McKinsey report points out, the probability of experiencing a hurricane sufficiently intense to disrupt semiconductor supply chains in Taiwan, South Korea and China is set to quadruple by 2040. 

Hurricanes among worst supply chain disruptions

Hurricanes damage critical infrastructure, such as roads and power, and can destroy manufacturing assets, including buildings and specialised equipment. 

Such destruction inevitably leads to a spike in the cost of labour, energy, and logistics – at a time when cost inflation is rampant anyway. And this combination of factors chokes cash flow, which is the oil that lubricates global trade. 

Further research from the United Nations’ Development Programme shows that workplace and corporate disruption from climate change could total US$2.5tn by 2030 in the US alone. 

Organisations that fail to legislate for climate change-based disruption to their supply chains are asking for big trouble. Managing such risk has never been more important. Helping businesses on this front is New York-based Skyler Chi, Global Head of Third Party & Supply 

Chain Risk Management with risk management specialists Exiger, who says ground-zero in handling climate change is to “educate your entire organisation”.

Adapting to climate change is no small thing

Chi says that adapting to climate change is a dramatic evolution from the usual adaptive changes businesses have to make, which are smaller in scope, scale, and impact.

“We’re talking about transformational change,” he says. “And this is a significant departure from the status quo.” 

Chi advises that, as an initial step, organisations culturally prepare their employees about the importance of climate change impacting their supply chains. 

“Every employee – from CEOs setting the tone at the top to individual managers individually assisting their teams – must recognise and understand the importance of climate change and that the need to adapt is critical,” he says.

Chi also advises that businesses set clear, climate-focused priorities. “The best way to eat an elephant is one bite at a time,” he says, pointing to the fact that dozens of organisations who are recognised as standard bearers on climate regularly publish complex sets of climate-specific guidelines. 

“To assess climate change risk, have a clear set of priorities,” he says. “Is your organisation looking to reduce its carbon footprint? Are you more concerned with potential supplier outages in high-risk regions, such as the South China Sea? Is your just-in-time inventory management for critical components at risk of disruption?” 

Climate change risk management measurability key

Chi adds that performance on key priorities must also be measurable. Here, he points to the Task Force on Climate-related Financial Disclosures (TCFD), which is just one among many initiatives that calls for corporate disclosures of climate-related physical risks. 

The guidance also provides resources to guide climate-related risk assessment and disclosures, which can focus a business’s climate-focused priorities. 

Data is also vitally important in the managing of climate risk, according to Chi. “Use a data-driven process to map your supplier ecosystem to multiple tiers and criticality thresholds,” he advises.

“Companies without supply chain risk management visibility and strategy lack the insight to anticipate risk across their extended ecosystem. Your organisation must know if highly interconnected supply chain networks are exposing your organisation to risk that may severely affect operations.” As such, Chi advocates for visibility on ecosystems to reach at least three tiers of the supply chain. 

Progressive enterprises model climate-related supply chain shock scenarios as a form of preparation and training, says Chi. “This allows them to prioritise the extent of supply shocks and determine how to mitigate, going forward. Organisations that have mapped their supply chains and prioritised risk scenarios can model high-risk disruption events into their ecosystem.” 

Chi believes digital twin technology can also be used for impact assessments of various climate-driven events, such as fires, floods, and tectonic events. “Today’s risk scenarios consider several, product-specific inputs, such as supplier network reliance, financial cruciality, product-specific complexity, and supplier resilience.” 

Risk mitigation is either ‘buffering’ or ‘bridging’

Chi goes on to explain that, in general, supply chain risk-mitigation strategies are categorised as ‘bridging’ and ‘buffering’, and that it is important to understand the distinction.

“‘Bridging’ means bridging the gap with suppliers to make sure communication is strong prior to, during, and after any type of crisis including climate-related events.,” he explains. “Supplier questionnaires can be created, to ensure that suppliers have risk mitigation strategies in place, while other forms of direct and indirect communication can help bridge the communication and knowledge gap between buyers and suppliers at every tier.”

Buffering, meanwhile, is having adequate inventory reserves in the event of primary suppliers being hit by climate-driven disruption events. “Buffering strategies can be applied against suppliers that are above your risk-scenario thresholds,” he says. “This will reduce the potential harmful impact of climate change.” 

In addition, buffering strategies might include dual-sourcing critical materials from different geographic regions, so that if one breaks down, the other will prevent shortages. 

“As an added benefit,” he says, “companies can support their domestic industries and shorten their supply chains by shifting production to domestic facilities or nearby countries.”

“In many cases, the cost of production relocations to less risky locations are far offset by the ESG-related risks of keeping production within higher risk regions.” 

Ultimately, Chi says, buffering should “act as a shield at different degrees and levels”. 

“Buffering strategies designed to protect you from climate-specific disruptions can also be intentionally designed to support your organisation’s other ESG goals,” he concludes. “For example, choosing buffering strategies with a significantly reduced carbon footprint.” 

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