Climate Risk to Supply Chains

As the world continues to warm we are seeing increasingly dramatic weather events as well as long term shifts in environmental suitability. Often, we discuss the impact to nature and humanity in very abstract terms, with little specificity for how it will change our daily lives. With that in mind, I wanted to take a moment to share my thoughts on how we anticipate climate change impacting global supply chains.

While there are many risks facing firms today climate related risks are among the most pressing. The most critical of these include value-chain risks (such as physical asset risks, price uncertainty, and product availability) and external stakeholder risks (such as ratings of their products, reputation of the firm, and regulation). The value chain specific risks affect not only how a product is produced but also how it can be transported. If extreme weather events become more frequent in certain regions of the world this could dramatically affect shipping routes and distribution systems that small businesses depend on.

For a worst-case scenario, we could envision a product needing to be manufactured with a different metal because the price of the ideal metal has increased due to climate induced volatility. Additionally, that product may need to have its shipping route moved to accommodate smoke from forest fires or more severe storms in the tropical oceans. Compounding these issues is the probable need to move manufacturing centers around the world to “chase” favorable environmental conditions to support production.

By planning and proactively dealing with the climate crisis, firms, both large and small, can mitigate risks and build competitive strengths off the changing ecological and social landscape. If a business is looking at how climate change will impact their operational regions they can make strategic decisions about when to move various components of their firm to beat the rush of people who will be forced to move when the climate worsens. An example can be seen in firms relocating their corporate headquarters and plants away from low lying coastal regions and more towards inland locations that are protected from flooding and severe storms.

There is also the opportunity to move a manufacturing plant to somewhere that may have better access to water and sources of raw materials in the future. Firms can also take proactive steps to fight climate change by publicly pledging to reduce carbon emissions and by using biodegradable/recyclable packaging. This confers a positive image on the firm and can allow them to charge higher prices as consumers are generally willing to pay more to support a green business. All of this can be tied together with strong planning to allow for operational agility so firms can adapt to both the changing environment and changing consumer demands.

It is not only the large, globally distributed, companies that need to proactively plan for these climate risks but also those smaller businesses. Climate change doesn’t discriminate between large and small businesses and one could argue that the smallest firms will be hit hardest by these changes. However, by adapting quickly and maintaining flexible supply chains the smallest of firms can outmaneuver the established companies. In a rapidly changing world, those who can pivot quickly are the ones who are likely to have the most success.