Home Depot’s Hurricane Harvey relief efforts – Source: The Home Depot Foundation
Will climate change make supply chain disasters the new normal?
Forty-four percent of chief supply chain officers say they have a general sense of potential climate change risks based on previous events, but they have not methodically identified or quantified those risks, according to a Gartner survey.
Of the rest, 27 percent have conducted a climate change risk assessment to identify their most critical supply chain risks and 18 percent have conducted both risk assessments and scenario planning. Only 11 percent felt climate change wasn’t a future risk.
The National Centers for Environmental Information, a federal agency, estimates that the number of billion dollar weather and climate disasters taking place in the U.S. each year has skyrocketed to an average of 20 in the last two years, including winter storm/cold waves, droughts/heat waves, wildfires, tornadoes and tropical cyclones. In the 1980s, there were only about three per year.
The pandemic and Russia’s invasion of Ukraine proved that the world’s delivery network is fragile, threatening ports, roads, railways, bridges and factory closures. As evident with chip makers in Southeast Asia, many of the world’s factories are far too geographically concentrated.
Longer term, rising sea levels are a particular threat to ports, while increasing average temperatures and changes in precipitation patterns will require overhauls to the world’s food supply.
Any increasing frequency and size of supply chain-related disasters will also work against company efforts to decarbonize and reach other environmental goals. New costs could arrive from carbon taxes when shipping goods across borders, as well as higher transport costs for moving products by sea or air.
Gartner finds the top barriers to planning for climate change in the supply chain include a focus on short-term decision-making (57 percent) and an inability to link the cause and investment to benefits (57 percent).
Some see supply chain management being hampered by built-in inertia.
“[Long-term] strategy and logistics are opposite things,” Dale Rogers, a business professor at Arizona State University, told Wired. “Logisticians are always trying to execute the strategy but not necessarily develop it. They’re trying to figure out how to make something happen now, and climate change is a long-term problem.”
- Gartner Survey Reveals 27 percent of Chief Supply Chain Officers Have Conducted a Climate Change Risk Assessment – Gartner
- Billion-Dollar Weather and Climate Disasters – National Centers for Environmental Information
- Climate Change Could Worsen Supply Chain Turmoil – The New York Times
- How Exposed Is Your Supply Chain to Climate Risks? – Harvard Business Review
- The impacts are immediate, and the time to act is now. – Gartner
- Adapt Now: A Global Call For Leadership On Climate Resilience – Global Commission On Adaptation
- Climate Change Is Disrupting the Global Supply Chain Too – Wired
- Deloitte research reveals inaction on climate change could cost the world’s economy US$178 trillion by 2070 – Deloitte
Discussion Questions
DISCUSSION QUESTIONS: Do you think retailers are doing enough long-term strategizing when it comes to the risks posed by global warming on the supply chain? Where do you see supply chain vulnerabilities and how well are retailers prepared, for example, to deal with extreme weather events tied to climate change?
Poll
Loading …BrainTrust
Gary Sankary
Retail Industry Strategy, Esri
Ryan Mathews
Founder, CEO, Black Monk Consulting
With the disruptions to supply chains from pandemic, war, and threatened rail strikes, I can’t imagine that retailers aren’t already calculating how they will be impacted by climate change-driven consequences and how they should best prepare.
Most retailers are using fairly rigid legacy systems (e.g., ERP, distributed order management, inventory planning), and have longer buying cycles that don’t allow them to respond rapidly to changes in supply and demand. The recent supply chain issues have resulted in both empty shelves in some categories and inventory bloat in others. Getting it right over the course of six to 12 months is hard. Let alone doing the analysis required for long term strategic planning. This might include catastrophe modeling to determine the potential impact to their suppliers, stores, distribution centers, and the amount of demand generated from high risk areas, so they can develop proactive plans to mitigate risk. But most roles within a retailer are focused on day-to-day operations or short term planning.
In some industry verticals, we’re seeing more chief sustainability officers, a strategic role that looks across the business and leads development of longer term strategies for improving key sustainability metrics, but also assessing risk across the business. It will be interesting to see if more retailers consider adding this role.
I agree with Nicola, for most retailers this is more of a questions of stock outs and excesses, and the misalignment of plans to the realities of demand.
We’ve seen multiple retailers fixing some of the tactical issues around system and process silos; getting stock into the DCs and distributed appropriately generally helps the environment (more FTLs), reduces cost and lets them leverage their inventory better, but there are no fundamental shifts in the leverage of data in planning yet.
Business resiliency has become a very hot topic. I am seeing more and more retailers asking questions about risk mitigation associated with climate change, and with good reason. The best companies understand that building the capabilities to respond to disasters, climate-related or otherwise, requires a resilience strategy with short-term execution, guided by long-range planning. For example, they are incorporating data about where coastal flooding will impact stores 20 years from now to inform their current planning and development strategies.
Another example is sourcing raw materials that are climate dependent. Take cotton, for example. It’s important to understand how changing weather patterns might affect growing conditions in the future. There are decisions they can make now to mitigate disruption when the supply of that raw material becomes more volatile.
Finally, resilience boils down to sustainability. The more sustainable a business is in its operations and supply chain, the more inherently resilient they are going to be.
Supply chains were built on current assumptions. As the realities of climate change, global pandemics, and political aggression set in, systems will need to be updated and made more agile to adapt quickly.
The last quote by the ASU professor is a doozy. “Climate change is a long-term problem.” Tell that to the people of Pakistan. Tell that to the people of Russia where 67 percent of the country sits on soil that is permafrost – it is melting, the ground underneath their homes, business, factories, feet is going away. The other day I heard a radio spot encouraging me to order survival food that can last 25 years in preparation for the apocalypse. Supply chain is highly vulnerable. Between this and deforestation, this is why all the world’s governments as well as business institutions – especially manufacturing, oil and gas – better help all of us save the planet.
In a word, no, although in general most businesses are equally guilty of the same short-term thinking. Retailers apparently believe that they can continue to do business selling products that can’t be sourced to consumers who can’t afford them in stores that may be burned down or under water. Sound a little melodramatic? Consider this. As you read this over one-third of Pakistan is under water and over 33 million people have been displaced. Unless things change, and there is no reason to believe they will based on current progress, what’s true in Pakistan today may be true in New Orleans, Miami, and the lower east side of New York City. And, while you may not have heard of it, Antartica’s Thwaites Glacier – sometimes called, “The Doomsday Glacier,” may be less than a decade away from melting to the point that it could raise sea levels by as much as 25 inches, effectively submerging most coastal areas. We are talking 2031 here, a date that with luck most of us will live to see. So, what will supply chains look like when every port city in under water? Not too good I think. But not to worry, retail CEOs will continue to jump into their private jets to fly to conventions to discuss how they should start thinking about the dangers of climate change.
I cannot stress enough that retail needs to move away from hyper-reactive and into predictive. This is the case for many business challenges. The speed at which consumers are attempting to reverse climate change is unfortunately not fast enough to allow solutions to be short-term. I do not see retailers in a competent place with climate change-affected challenges. However in addition to working on those, I also want to see more retailers focused on helping the root cause and reversing climate change.
I hate that this is framed as a “long term” problem. I understand that the professor meant that it will likely take decades to overcome this challenge, but people don’t often take the time to read between the lines (or beyond the headlines), and I fear that people will interpret that to mean we don’t need to act in the short term. This problem is here and now and immensely impactful to our supply chains. I hear our retail clients talking about mitigation strategies all the time, but there are no easy answers. The best risk mitigation strategies typically include bringing supply (much) closer to demand. Which, of course, has major cost implications, and it cannot happen quickly. Regardless, I do think we have to find a way to shorten the “chain” in supply chain as one the first of many critical steps to be taken.
Not that businesses shouldn’t do more to be ecologically friendly, but their actions will have little to any effect on “climate change.” Several people have mentioned Pakistan’s floods, but the country regularly goes through periods of massive, devastating flooding. The 2010 monsoon season was even more deadly than the current season and it has little to do with climate change. National Institutes of Health scientists have found solar activity is the primary cause of these periods of excess flooding and subsequent droughts. El Nino and sunspot activity are the primary culprits.
The U.S. is already the world leader in the reduction of greenhouse gases, and unless China does something to curb its emissions it won’t matter really what U.S. retailers do. China is the world’s biggest polluter, accounting for 27 percent of global emissions, so yes, consider the environmental impact of your actions, but retailers shouldn’t lose sleep over it.
Some do a very good job, some poor, some do nothing: unfortunately, since contingency-planning takes times and money — i.e. it’s an expense with little immediate payback — the market often rewards this last group … at least until disaster strikes.
Happily, the same best practices (backup, redundancies, diversification) that typically make a business more efficient in general, will make them more able to handle emergencies (although as noted, management may need to fight off ill-considered calls for “efficiency”). Unhappily, each disaster also teaches us there’s a limit to what can be done.