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Managing climate vulnerabilities in your supply chain

A growing risk for many organizations is climate-related supply chain disruptions, as the frequency and severity of extreme weather events accelerates.
Glass sphere over a river with trees in nature — Climate neutral into the future concept - Net Zero 2050

The supply chains that underpin the global economy are facing escalating challenges from labor shortages, inflation, geopolitical tensions, and, ever-increasingly, climate change.

As a result, supply chain issues are rising up the boardroom agenda in many industries, with business leaders wanting to better understand evolving risks and how those risks can be better mitigated and managed.

Although indicators like the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index show transportation and manufacturing KPIs closer to historical levels, critical vulnerabilities and disruptions remain.

Climate change as an accelerating risk

A growing risk for many organizations is climate-related supply chain disruptions, as the frequency and severity of extreme weather events accelerates. The World Economic Forum’s Global Risks Report names natural disasters and extreme weather events as the second-most severe risk over the next two years and third most severe over the next 10 years. As events become more frequent and widespread, the potential downtime and cost to businesses from supply chain interruption is increasing.

       

Extreme weather can cause physical damage and operational disruptions, low rainfall and droughts can prevent commodities and products from being transported on rivers and waterways, and water scarcity has the potential to impact most manufacturing processes.

Sinking water levels in the Rhine, extensive wildfires in Canada, and the 2021 Texas freeze highlight the climate-related supply chain vulnerabilities facing businesses. And all of these issues that impact assets and operations can also severely impact people and the communities in which they live.

In this new normal, many companies, especially those in industries with high supply chain risk exposures, are prioritizing climate risk management and building supply chain resilience.

What supply chain professionals and risk managers can do

Some organizations are adapting to climate change by boosting their inventory to buffer against shocks, while also working to alter the layouts of their networks to address vulnerabilities. Changes to global supply chain structures, however, are still in the early stages.

For risk management professionals, risk quantification and scenario analyses need to happen cross-business and between teams, as they frame the conversation in shared terms. This is particularly important with regards to large-scale disruptions, where there may not be one sole response to an event and the impacts could be enterprise-wide.

In a recent report, Marsh McLennan specialists recommended five steps for companies to strengthen supply chains:

  • Create a transparent supply chain: Few organizations see beyond their first tier of suppliers, yet the biggest disruption risks often reside in the second and third tiers.
  • Uncover hidden vulnerabilities by asking “what if?”: Deep-dive evaluations can identify the nodes on which revenue continuity most depends.
  • Use the right tools to assess risks: Converting different risk data into a common currency, such as a standardized score or financial metric, can support decision-making and simplify risk management.
  • Preempt and mitigate risks: Businesses that proactively manage supply chain risks suffer less disruption, are quicker to recover, and hold a competitive advantage.
  • Transfer risks where possible: In addition to contingent business interruption, parametric insurance can be designed to protect companies against specific supply chain risks.

The success of these steps rests upon effective collaboration across business functions, including risk management, supply chain, sustainability, strategy, and people. A unified view of a supply chain — who is involved, where they are located, what pre-event exposure assessments and exercises are in place, how to share tools — is fundamental to establishing best practices and building short- and long-term supply chain resilience.

Learn more in our webinar recording on managing climate vulnerabilities in your supply chain.

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