How Exposed Is Your Supply Chain to Climate Risks?

Summary.    Climate change is posing major challenges to supply chains. This article — based on a collaborative research project conducted by the University of Maryland and supply-chain-mapping firm Resilinc — assessed the climate-related risks of 12,000 supplier sites in...

Hurricanes, tornadoes, flooding, heat waves, and wildfires — weather-related calamities have alarmed boardrooms across industries and awakened leadership teams to the high degree of financial risk posed by climate change. Executives now 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 collaboration between supply-chain-mapping company Resilinc and the University of Maryland’s Supply Chain Management Center and Earth Systems Science Interdisciplinary Center yielded interesting insights that can help answer these questions — at least as they pertain to the United States, China, and Taiwan.

In our study, we analyzed the supply chains of 100 original equipment manufacturers (OEMs) in the high tech, auto, and consumer goods industries. These OEMs either directly owned or outsourced to first- and second-tier suppliers — 12,000 U.S., Chinese, and Taiwanese production sites in our sample. For each site’s latitude and longitude, we collected 35 years of satellite-derived temperature data and 20 years of precipitation data. We measured climate variability over time and documented dramatically less and more rainfall and sharp temperature swings. Then we connected the climate data to Resilinc-collected site data about business impacts (e.g., the revenue an OEM was at risk of losing if the supplier site was disrupted by a climate-related event), 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 (as estimated by local business continuity experts).

The U.S. sites we studied form clusters of industries, including pharmaceuticals in the Boston metropolitan area and New Jersey, the automotive sector in the upper Midwest, and telecommunications and information technology in the Bay Area of California. Chinese and Taiwanese sites are concentrated in the Pearl River delta (mostly information technology); the Shanghai, Tianjin, Beijing, Chongqing, and Chengdu metropolitan areas; and Taiwan.

The map below highlights the supply chain sites with the largest temperature and precipitation swings over the period of study. These sites are exposed to the greatest climate variability and fastest rates of climate change in terms of temperatures and precipitation and therefore are at high risk of being hit by events such as storms, flooding, heatwaves, droughts, and fires. Our analysis found 49% of the sites in the United States, China, and Taiwan (in red) 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.

It is important to note that climate risk is not determined solely by geography. Making an effective decision about site level risk requires having visibility into additional factors such as revenue at risk of being lost if the supplier site went down and resiliency.

For supply chain executives at the OEM companies that own or outsource these first- and second-tier sites, the most critical sites are those whose disruption would have major impacts on the OEM’s revenue. (For each firm, we ranked all their operational locations according to the revenue these sites contribute to the firm; we designated the top one-third of those sites as “high-revenue-at-risk” locations.)

These impacts include both the immediate inventory/revenue loss from a site going down, as well as the indirect costs to the OEM of that site’s outputs being unavailable as inputs to other corporate products. For example, the Apple home button, though a small cheap part, is used across the iPhone and iPad categories, and its sudden unavailability would cause Apple to lose a significant amount of revenue. So supply chain executives need to fully map and understand these production interdependencies in ranking the strategic priority of a site.

From a risk management perspective, the highest priority sites are those where all these factors are at play: Their disruption would have the greatest impact on the OEM’s revenues, they have the most exposure to climate variability, and their resilience measures (e.g., a business continuity plan or an alternative site has been identified and prepared) are deficient. Such sites represent both the biggest threats to a company’s supply chain as well as the biggest opportunities for improvement. These sites are shown in red in the map below. Eighteen percent of the U.S. sites and 11% of those in China and Taiwan fall into this category.

There are also regional differences in levels of response capacity and site resiliency. We consider a site resilient if it has a functional business continuity plan that covers emergency and crisis management protocols, stakeholder communications, disaster recovery and insurance, and/or an alternate production site that can be put into operation quickly. The top 30% of sites we studied could shift production to an alternate site in 10 weeks or less.

Eighty 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; in other words, they are unprepared for disruptions to their operations. Of the high-revenue-at-risk sites, 72% of those in the United States and just 38% of those in China and Taiwan lack these formal measures.

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. Within this elite group of sites, managers had embraced the challenge of gathering, integrating, interpreting, and acting upon climate and business threat data to improve resiliency.

These findings illustrate that most companies are ill-prepared for climate-related disruptions. The good news is companies increasingly have access to the advanced data analytics and best practices necessary to make their supply chains more resilient.

Playbook For Creating a Climate-Ready Supply Chain

Here are measures that manufacturers can implement to mitigate climate-related risks. They are derived from both the University of Maryland-Resilinc research project as well as Resilinc surveys of 200 companies that are proactively preparing their supply chains for climate 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.

It’s equally important to have seasoned experts onboard who can critically interpret incoming climate data and provide actionable guidance in real time — during “the fog of war” of major climate events. Both FedEx and Walmart had meteorologists on staff who gave early warnings about Hurricane Katrina and accurately tracked and reported the storm’s path and impacts. These experts helped their companies successfully pre-position and reposition assets, inventory, and fleets of planes, trucks, and ships to navigate the disruption.

Today, supply chains everywhere face major climate-related threats, and companies now must step up efforts to sense and respond to them. Executives must intensify their efforts to weather-proof their supply chains through intelligent investments in network mapping, supplier collaborations, and assessing and mitigating the risks to sites. By reaching scale in such initiatives, multi-enterprise supply chains will be better able to adapt to the rapidly unfolding global climate crisis.