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How exposure to climate risks make supply chain vulnerable

Global economic production mainly depends on a network of interlinked supply chains, ensuring the circulation and exchange of products (from essential to luxury goods) are done efficiently. Circulation of products across the globe is crucial for realizing adequate surplus demands to carry on a business, which is possible through the interdependence of multiple supply chains worldwide. Therefore, the significance of studying and analyzing the effectiveness of supply chains under myriad circumstantial hindrances has been discerned over the years. The high degree of financial risk posed by weather-related calamities to supply chains has been the cause of concern for business continuity across the globe. Let’s focus on various impacts of climate risks on supply chains. 

Climate Risks in Supply Chains 

In a study published in May 2022 by the Harvard Business Review, an analysis was made of 100 original equipment manufacturers (OEM) in the high-tech, auto and consumer goods industry. Data collection in the study focused on collecting 35 years of satellite-derived temperature data and 20 years of precipitation data, which was used to measure climate variability over time. Through this study, experts also identified the hotspot supply chain sites exposed to great climate variabilities and the fastest rates of climate change in terms of temperature. 

The most critical supply chain sites are those whose disruption would majorly impact the OEM’s revenue. It is found that 18% of the US sites and 11% of the supply chain sites in China fall into this category. The impacts include the immediate inventory/revenue loss and the indirect cost of the OEM sites’ output being unavailable to other corporate supply chains as inputs. Overall, only 11% of the supply chain sites are equipped in the face of climate-related disruptions, however, companies today have access to advanced data analytics and best practices necessary to make their supply chain stronger via network optimization strategies. 

How to Create a Climate-Ready Supply Chain? 

The preparations to manage and handle climate-related disruptions in the supply chain include the pre-arrangement of backup sites and formidable business continuity plans (which can be put into action quickly.) Continuous action regarding managing, interpreting and integrating climate and business threat data points can help improve resiliency in supply chains. Mapping the supply chain’s value stream can also help evaluate the cost and risks of impactful climatic events. This can be done by updating and evaluating information frequently or at regular intervals to get a complete picture of the supply chain network. 

Conclusion

Independent examination of supply chain vulnerabilities to local natural disasters and geopolitical risks around environmental factors is a crucial exercise for mitigating the risk associated with climate change. A solid business continuity plan premised upon informed decisions (such as managing their extended supplier network, keeping alternatives to switch to faster sources and analysing different supply-chain-network configurations) is the key to better management of supply chains in the face of climate risks. 



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Disclaimer

Views expressed above are the author’s own.



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