Thirty years ago, a typhoon hitting China would have had little impact on world business. Today, such an event would seriously disrupt an almost countless number of global supply chains. In other words, climate change is a growing business risk not just because significant climate events have become somewhat more frequent, but because supply chains have elongated and become more global, putting a company’s supply chain in the path of more climate events. Plus, in many cases, supply chains have been managed to be so lean and efficient that they have also become brittle and vulnerable to disruptive events. They lack resiliency and create financial outcomes that could impact the business strategy.
We see climate change risk to supply chains developing along three trajectories. The first type of climate change effect is the very focused, catastrophic weather event: the hurricane, tsunami, flood, earthquake, etc. While the ability to attribute any one of these events directly to climate change is hotly debated, their aggregate number seems to be on the rise. And when they occur, they have a very sudden, very dramatic impact on supply chains that cross their path.
Second are broader, near-term climate change events, such as El Nino. Their effects are better understood and this can help companies plan. For example, in California, increased torrential downpours during El Nino years have historically caused severe flooding and mudslides, snarled traffic and overwhelmed infrastructure. Given that the port of Los Angeles is the busiest in the country, supply chain managers should take note and make plans. Meanwhile, El Nino causes droughts in other parts of the world, such as Brazil where an ongoing drought has already caused the price of sugar to surge. Companies that plan with these events in mind are better able to decide when and where to procure raw materials such as sugar, protecting their own profit margins and driving a competitive advantage.
Finally, there are the long-term effects of climate change that companies should consider as they build their supply chains for resiliency. U.S. Department of Agriculture data indicates a clear migration north for corn yields, which in North Dakota, can be attributed to growing seasons lengthening by 12 days and average temperatures rising by 2.7 degrees Fahrenheit, according to North Dakota State University. That’s a slow-moving but dramatic shift, and some food industry companies are increasingly concerned about the long-term sustainability of supply. They are considering the right breadth and depth of supply over the next five or 10 years, and how much static inventory they should hold on hand in the case of disruption.
In response to these climate challenges, executives need to seek better visibility into their own supply chains and grapple with greater complexity. They need to understand the entire ecosystem - not only their suppliers, but their suppliers’ suppliers, and their suppliers’ suppliers’ suppliers. By knitting together this ecosystem, leveraging external data sources, and identifying brittle areas in the supply chain, executives can take measures to build resiliency that doesn’t disrupt their business strategy.
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