Weathering Climate Change and Supply Chain Risk
Companies have become more aware than ever of the considerable risks that climate change poses to their businesses and supply chains. A current or future risk related to climate change was identified by 70 percent of the 2,500 companies responding to Reducing Risk and Driving Business Value, a 2012 survey conducted by the Carbon Disclosure Project (CDP) and Accenture.
These risks are defined as having the potential to significantly affect operations or revenue. More than half of the supply chain risks due to drought and precipitation extremes are already affecting respondents’ operations, or are expected to have an effect within the next five years.
Other concerns include the potential for reducing or disrupting production capacity, reduced demand for goods, and even the inability to do business.
Many leading companies are taking innovative steps to address these risks from the perspective of supply chain sustainability. Some, for example, are optimizing carriers to ensure the most efficient methods of transporting goods.
Other companies are optimizing transport containers. One large oil and gas marketing company, for example, is using between 15 and 20 percent of raw materials containers arriving at its plant for loading end products and returning them to the seaport.
Some companies are using SmartWay carriers; one U.S. consumer products company routed more than 95 percent of truckload traffic in 2011 through SmartWay carriers, resulting in significant fuel savings.
Other levers for embedding sustainability in inbound logistics could include: increasing full-load shipments; reducing the number of trips; reducing empty truck returns; adopting cleaner transportation modes to reduce CO2 emissions; and selecting in-region suppliers to reduce inbound distance.
Survey results also indicate that only 25 percent of respondents that cited water-related supply chain risks as a major concern have done the work to identify risks at the level of detail necessary to mitigate potential disruption.
Supplier awareness is an even greater concern. Nearly one in five respondents indicate that their suppliers are not aware of the water risks affecting operations. Another 38 percent say their suppliers are aware of, but not actively engaged in, addressing the challenge.
Too few discussions of supply chain risk management deal with reducing risk costs in a systematic, quantitative way. Companies can take four major steps to address this process:
- Review how data is collected and managed. Companies collect data through scorecards, questionnaires, audits, and other methods. But survey results indicate that more work needs to be done to determine best practices for analyzing data, and using the results to improve both practices and processes.
Organizations still have much to do to turn data into information and knowledge they can use for better decision-making. Properly collected and organized data is the foundation for supply chain risk analytics that can point the way to effective action.
- Make governance more effective. Many companies are improving collaboration among internal functions, with marketing, legal, and other teams now more involved in decision-making related to sustainability and climate change risk.
While procurement may continue to play a central role, companies could facilitate improved collaboration between the procurement team and other internal and external stakeholders to improve processes, and to ensure that risks related to climate and other possible disruptions are properly identified and factored in the way they define and manage processes.
- Improve collaboration with suppliers. Ninety percent of CDP supply chain program members participating in the survey identify physical risks related to climate change, compared with only 45 percent of suppliers surveyed. Risk management can be built into supplier rewards and incentives, with reports on energy and climate risk management a requirement for reaching compensation goals.
Companies can also push suppliers to institute board-level management of climate change strategies, including disruption risk.
- Actively manage stakeholder relationships. Investors—who are well aware of the wider impact of a company’s supply chain sustainability on the environment—may punish companies that fail to address climate-related supply chain risks. Companies may wish to review and, if necessary, expand efforts to educate shareholders and other stakeholders about efforts to increase supply chain sustainability while protecting future operations and revenues.
The supply chain can play a key role in innovations such as low-carbon products, sustainability related services, better product and packaging design, and other developments that can help increase revenues, enhance reputations and, in many cases, command premium pricing. The growing awareness of supply chain risk caused by major weather events, water shortages, and other conditions can be expected to increase investment in broader emission-reduction initiatives.
Companies that recognize supply chain risk presented by climate change may be more likely to look for innovative ways to reduce emissions and realize further cost savings.
The risks that climate change poses to business operations and continuity are real, and supply chain professionals play an important role in mitigating those risks. At the same time, however, improving supply chain sustainability, and protecting against risk, provide new ways to identify opportunities for revenue-generating innovations.