Thursday, April 11, 2013

Building Resilience to Supply Chain Disruptions due to Climate Change

Anticipating problems associated with climate change and planning appropriate strategic responses are critical elements of contemporary business. Companies need look ahead to identify environmental vulnerabilities attributable to climate change and find ways of addressing them. As climate change worsens supply chain disruptions can be expected to increase.

The global nature of modern day procurement means that things like extreme weather events in one part of the world can have far reaching impacts. The destructive effects of climate change are already reverberating up and down supply chains around the world the disruptions associated with climate change are almost certainly going to get far worse. Some estimates indicate we are going to see a six degree rise in temperature by the end of the century.

A report titled report titled “Value Chain Climate Resilience: A Guide To Managing Climate Impacts in Companies and Communities,” identifies who is most vulnerable and posits the best strategy for mitigating that risk. The report singles out manufacturers with substantial supply chains and advocates a strategy based on creating extensive supply/distribution networks.

According to a 2012 PwC report, 10 Minutes – Risk ready: New approaches to environmental and social change, many companies now view preparation for climate change not only an indicator of resilience, but also as a competitive advantage.

Companies should embed sustainability practices into their business models and work on developing strategies to mitigate or adapt to the risks associated with extreme weather events. The first practical step is identifying vulnerable areas.  Companies should work with their suppliers to pinpoint potential areas of concern.

Companies need to carefully review their long-term assets and infrastructure, particularly in coastal and low-lying areas. Sectors dependent on food, water, energy or ecosystem services need to scrutinize the resilience and the viability of their supply chains. Carbon-intensive sectors need to plan for more invasive regulation and the possibility of stranded assets (an asset that has become obsolete, or non-performant).

Once vulnerable areas are identified the PwC report recommends building resilience to climate change and mitigating risk with the help of buffers. Buffers are the margins that provide short-term space needed to absorb a shock after a traumatic event or incident.

Major advancements in supply chain efficiency in the past several years, including Walmart’s Sustainability Index and the introduction of the apparel and footwear industry’s Higg Index provide guidance on sustainable supply chain planning.

Companies must identify their exposure to climate risks and develop appropriate supply chain strategies.

© 2013, Richard Matthews. All rights reserved.

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