Extreme weather that has increasingly hammered factories, rail lines, ports and highways is expected to intensify as the globe continues to warm.
Across industries, leadership teams have awakened to the high degree of financial risk posed by this climate change. Executives are asking: How exposed is our global supply chain network? Which critical sites have the highest exposure in terms of revenue impact? Which types of events could potentially affect each site? Are appropriate business continuity plans in place to protect our operations?
A UMD team -- Robert H. Smith School of Business Research Professor Emeritus Sandor Boyson, Smith PhD graduate Laharish Guntuka (now with Rochester Institute of Technology’s Saunders School of Business) and College of Computer, Mathematical, and Natural Sciences/ESSIC Associate Research Professor Michael Gerst — analyzed temperature and precipitation data of 12,000 U.S., Chinese, and Taiwanese production sites in supply chains of 100 original equipment manufacturers (OEMs) in the high tech, auto, and consumer goods industries.
They connected the climate data to data collected by supply-chain-mapping company Resilinc -- site data about business impacts, the availability of backup manufacturing sites, the existence of a business continuity plan, and how long it would take the site to recover if disrupted by an extreme climate-related event.
They found 49% of the sites in the United States, China, and Taiwan experienced an increase in climate variability, with the proportion much higher in China and Taiwan (93%) than in the U.S. (33%). Nearly all the sites in China had experienced an increase in heat waves. This intensification of extreme climate events is consistent with the findings of IPCC reports.
The most critical sites are those whose disruption would have major impacts on the OEM’s revenue, writes Boyson and his team in HBR. “For example, the Apple home button, though a small cheap part, was used across the iPhone and iPad categories, and its sudden unavailability would cause Apple to lose a significant amount of revenue.”
Regarding response capacity and site resiliency, 80 percent of all sites in the United States and 48% of all sites in China and Taiwan have either no business continuity plans or no alternative sites lined up that could be put into operation quickly.
Overall, just 11% of all sites in the three countries were fully prepared for climate-related disruptions — i.e., they had identified and pre-arranged available backup sites that could be put into action quickly and had formal business continuity plans and incident response playbooks in place.
However, “companies increasingly have access to the advanced data analytics and best practices necessary to make their supply chains more resilient,” say the researchers.
They describe, via HBR, the following measures that manufacturers can implement to mitigate climate-related risks.
Map your supply chain in depth. This means identifying all the sites across the world that directly or indirectly support manufacturing, warehousing, distribution, and repair by land, sea, and air. Collect data on the costs, risks, delivery times, and carbon footprints of each. This information needs to be refreshed annually.
Conduct a comprehensive assessment of each site’s risks. This examination should include its vulnerability to a local natural disaster, local economic indices, geopolitical risk factors (safety, security, corruption), proximity to suppliers and customers, access to stable energy sources, availability of natural resources, long-term labor (skilled and unskilled), and so on. Such assessments are critical because a one-size-fits-all strategy for mitigating climate risk is impractical.
Think beyond your own sites. All too many business continuity managers focus on their company’s own locations and don’t pay adequate attention to those of their suppliers and their suppliers’ suppliers. When a disruption occurs, companies that proactively manage their extended supplier networks can switch to alternative sources faster and optimize system-wide resources much better than those that don’t.
Build the business case for proactive mitigation. Companies must quantify the revenue impact of losing individual sites to make more informed decisions about how much to spend on improving the resiliency of their supply chains and prioritizing those investments.
Conduct simulations of how extreme climate-related events will affect your supply chain. Such exercises can be invaluable for developing playbooks for responding to various scenarios and can help executives analyze and compare different supply-chain-network configurations and sourcing options to manage climate risk more effectively.
Ensure climate models are sufficiently sensitive. Our own model revealed some counterintuitive information — such as Los Angeles had experienced the biggest increase in cold days in the United States and Sacramento had had the second-largest increase in extreme precipitation over the two-decade period of our study. Supply chain executives must be especially vigilant to detect such early warning signals of climate volatility.
Design a climate-resilient supply chain footprint. Use all the information described above to create a supply chain whose response to climate risk ensures not only business continuity but also distinct competitive advantage. Procter & Gamble’s coffee processing and packaging facilities in New Orleans, which accounted for 50% of P&G’s total U.S. coffee production at the time Hurricane Katrina hit in 2005, are a case in point. When P&G engineers built those facilities, they had used satellite imagery to identify industrial lots that were six to nine feet above sea level. Each facility also was designed to withstand 130 mph to 140 mph winds. Thanks to these moves, P&G was the first manufacturer to restore operations in New Orleans after massive Hurricane Katrina flooding in 2005. In 2006, the year following Hurricane Katrina, P&G held its 40% share of coffee sales to the U.S. home consumption market.
Transfer risk with insurance. Companies that quantify the revenue impact that the disruption of each site would have can more easily identify locations whose risks should be protected via insurance.
Bolster your suppliers’ business continuity plans. Suppliers are at constant risk of violating local environmental or labor laws. They can be sued, lose their business or export licenses, have shipments stuck in ports, or be disrupted by sudden climate-driven government mandates — like Chinese authorities closing Beijing factories over air quality. Consequently, it’s critical to inform and contractually obligate suppliers about the necessity of having backup plans, alternate production sites, and mutually acceptable recovery timeframes. Then companies should collaborate with suppliers annually to test these plans by simulating events through desktop drills.
Invest in early-detection systems and associated expertise. AI-powered scanning of climate news and events in many languages can provide weeks’ and sometimes months’ notice of emerging climate risk events and developments. Some risk analytics services (including Resilinc) will let business users overlay decades of hurricane tracking data onto a map of supply chain sites in hurricane-prone areas and display the sites color-coded by degree of vulnerability and business impact. Such climate monitoring and predictive systems have become essential to running a globally dispersed supply chain.
Read How Exposed Is Your Supply Chain to Climate Risks? at Harvard Business Review.
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