Climate crisis is an opportunity to design & build resilient supply chains

Kaushik Burman, VP Strategy | International Expansion, Gogoro

Climate risk and resilience have been the focus of scientific assessments for the past two decades – IPCC SR Ocean & Cryosphere report has done extensive modeling on the historical changes in the ocean and cryosphere since 1950 and projected future changes under low (RCP2.6) and high (RCP8.5) greenhouse gas emissions scenarios. RCPs (Representative Concentration Pathways) are scenarios that include time series of emissions and concentrations of the full suite of GHGs and Aerosols, including chemically active gasses, as well as land use / land cover. 

RCP2.6 represents a low greenhouse gas emission, high mitigation future, that in CMIP5 simulations gives a two in three chance of limiting global warming to below 2°C by 2100. By contrast, RCP8.5 is a high greenhouse gas emission scenario in the absence of policies to combat climate change, leading to continued and sustained growth in atmospheric greenhouse gas concentrations, leading to an increase of up to 5.2°C – to contextualize, as of 2017, we are already at 1°C.

Economic Impact from high frequency climate crisis events is material and staggering. Adaptation to climate change, and building resilience is key.

Circumstantial evidence on impact of global warming lends credibility from a recent analysis from Munich Re, which highlights that, “Since the 1980s, the number of registered weather-related loss events has tripled, and inflation-adjusted insurance losses from these events have increased from an annual average of around $10 billion in the 1980s to around $50 billion over the past decade.”  These losses are the result of increasing climate risk, which is determined by the existence of physical hazards, exposure to those hazards and underlying vulnerability.

Cities in California are under a scorching heat wave, whilst populated cities of South Asia (Bangalore, Karachi) are inundated by flash floods. The frequency of these high impact events is likely to exacerbate from here, whilst urbanization trends are going to clip at a faster pace. Therefore, there is highest urgency to design and build resilience in the supply chains to be able to serve customers, retailers, consumers and supply chain partners.

There are two main strategies used to manage supply chain risk and disruption and build resiliency: bridging and buffering.

Bridging involves the buying organization taking action to help build up the capacity of its suppliers to manage through and recover from disruptions. Buffering involves the buying organization taking action to protect itself from the consequences of supplier failures. In addition to discussing these two strategies, the section will conclude by discussing how to build a high reliability culture that supports and promotes resilience within a supply chain management organization. The buying company should focus its bridging or buffering actions on supply chains and suppliers that are most critical, from a cost, time, or functionality standpoint.

For example, if the company only has a single supplier for a particular item which is critical for the product or service that the company is creating, then disruptions to that supplier would create a disruption to the primary production or service activity. A bridging action might involve helping a supplier get low interest financing so that it can invest in capital improvements to make its facilities more robust to extreme weather events. A buffering action might involve finding a secondary supplier or keeping safety stock of the supplier’s item. Notice that a company may choose to implement both bridging and buffering strategies. One can think of bridging as the first line of defense, in that it minimizes the chance that a risk event will cause a disruption. Buffering is the second line of defense, in that if a disruption does occur, its impact is minimized.

Bridging strategies create a more resilient supply chain by helping a company’s suppliers become more capable of continuing operations should a risk event occur and recovering quickly and successfully should there be a supply disruption, i.e., via either coordination on risk awareness and planning, providing financing or expertise and strengthening the buyer-supplier relationship.

Buffering strategies involve the buying organization taking action to protect itself from the consequences of a supplier failure. Climate change related risks make it more likely that companies will need to use buffering strategies, because supply disruptions will occur no matter how resilient a supplier is, and the buying company is obligated to protect itself from such failures. Buffering strategy could be deployed by diagnosing the buyer-supplier historical partnership, and providing sufficient time based, and / or inventory addition led strategy. Additionally, if the parts and components are difficult to source from a lead time standpoint, then contingency planning and due diligence process for additional suppliers to get impanelled to address vulnerability issues.

Leveraging technology and advanced intelligence-gathering systems should be incorporated in the strategic supply chain development process. For example, Planet Labs is an advanced satellite imagery solution, which leverages satellites in the low orbit system to scan and process weather and climate pattern changes and generates insights that are invaluable. By subscribing to Planet data and intelligence systems, supply chain organizations could get access to near and long-term impacts of climate change.  Ultimately, climate resilience data is only effective when used to inform business strategies or targeted interventions. Once companies understand the climate risk exposure within their supply chain, identify priority suppliers, and diagnose the resilience capacity of these suppliers, they can use this data to design targeted resilience interventions.

Although supply chains are complex and it might seem it is more difficult to influence the activities of business partners, supply chains offer an opportunity for the impact that is magnitudes greater than addressing the issue only within a company’s own operations. Eventually, companies seek to translate climate risk intelligence into practical, operational strategies to build supply chain resilience, as all of this has a significant impact on the company’s shareholders and investors. 

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