01 Sep Climate Change Will Impact Your Supply Chains
Today, considering how climate change will impact your supply chains is crucial to your business. The trends are clear. The last nine years have been the hottest ever recorded. Each of the last five decades have been hotter than the previous one.1
Ocean temperatures are rising, which is contributing to an increasing frequency of extreme weather events worldwide, per scientists. These weather experts are telling us that during this most recent hot summer, we experienced a unique time period when all parts of the climate system were in record-breaking or abnormal territory. Even worse, with El Niño weather conditions present, it is expected 2024 will be even hotter.2
There is now a better understanding that sequential disasters can reinforce each other. In other words, heat, droughts and flooding are interconnected. The hot air picks up moisture, which dries out the soil. With more water vapor in the atmosphere, storms of increased intensity form. In time, when the heavy rain falls on drought-stricken land, the water runoff can be overwhelming.
With increasing frequency, extraordinary weather events are becoming ordinary. As a result, the growing impact of climate change on global and regional supply chains is coming into focus.
CLIMATE CHANGE IS ALREADY AFFECTING MANY SUPPLY CHAINS
40% of all US container-shipping traffic travels through the Panama Canal every year. As reported in the June SSI blog post, the Panama Canal is experiencing a water shortage due to a severe drought. Local fresh-water reservoirs are essential to help float cargo vessels overland. In response to the prolonged weather crisis, water-saving measures have been implemented by the Panama Canal Authority. This includes restricting vessel tonnage and reducing the number of ships allowed to pre-book transit.
Supply chain disruptions are mounting, as more than 150 vessels are waiting to traverse the waterway. Currently, the hold-up to cross the canal is 21 days. Shipping experts expect the delays to worsen. As a result, container-shipping carriers have been levying Panama Canal surcharges to shipping bills.
To sum it up, the prolonged drought in Panama is now beginning to impact thousands of supply chains by delaying shipments and causing business costs to rise as shippers incur substantial fees for each of their containers on every vessel.3
REGIONAL CLIMATE IMPACTS HAVE A RIPPLE EFFECT
Much like the current drought in Central America, a 2022 drought in southwestern China provides a clear example of how an isolated weather event creates a ripple effect for global businesses. A water shortage drastically reduced hydropower generation, leading to power cuts to factories that produced electronics, car parts, and other goods. Foxconn, Volkswagen, and Toyota, to name just a few, curtailed production.
Further, the Yangtze River dipped so low that larger vessels were unable to navigate their typical routes. This caused companies to scramble to secure trucks to move goods to ports. As a result, the availability of trucks to transport food declined. It was a double-whammy for the agriculture industry, as the drought curtailed production as well. Food prices nearly doubled.4
In 2022, the US experienced its own drought and waterway crisis as the Mississippi River dropped to near record lows. 92% of the country’s crop exports travel along the Mississippi, but last year, barge traffic was severely curtailed. At one point, more than 2,200 barges were queued up and waiting to get through two different stretches where traffic had been halted.
Shipping rates soared. For example, the cost to move soybeans to ports jumped 300%. The higher costs to move all crops southward and fertilizer back north to farmers had a domino effect which inflated food prices globally. 5
CLIMATE CHANGE: EVERYTHING, EVERYWHERE, ALL AT ONCE
Simply put, concurrent weather disasters quickly become greater than the sum of their parts. For the sake of continuity, let’s continue focusing on agriculture for insights on how compound events jolt supply chains.
Long droughts are currently impacting crop yields in the American Midwest and Argentina. This year, China’s biggest grain producing province was swamped by heavy rain and floods. India, the world’s largest rice exporter, has seen yields constrained by both droughts and heavy rains. The country recently banned most white rice exports, which is pushing up global prices.
Unfortunately, this summer, extreme heat has impacted huge swathes of the planet simultaneously. A scientist who monitors land temperatures at the European Space Agency has warned that this year’s heat is “severely” affecting food production in key regions of the world.6
Another climate scientist at Dartmouth College noted there is a record-breaking heatwave happening nearly every summer now, not just in one breadbasket, but in multiple breadbaskets around the world.7
So, the impact on our food supply networks is clear. Now let’s apply this information to your supply chain.
SUPPLY CHAIN MANAGERS MUST LOOK BEYOND THEIR OWN OPERATIONS
Unfortunately, climate change will impact a broad range of industrial and consumer product supply chains, either directly or indirectly.
Many countries are implementing new taxes and regulations to curb the negative effects of climate change. These actions may influence, or even require companies to transform the way in which they operate supply chains.
Further, as the Earth’s temperature increases, the severity of storms worsen. Devastating weather events can impact trade routes, thereby limiting the physical ability to trade.
The OECD is an intergovernmental organization with 38 member countries that exists to stimulate economic progress and world trade. In a recent statement, the OECD states, “maritime shipping, which accounts for around 80% of global trade by volume, could experience negative consequences, for instance from more frequent port closures due to extreme events. More importantly, climate change is expected to decrease the productivity of all production factors (i.e., labor, capital, and land), which will ultimately result in output losses and a decrease in the volume of global trade.” 8
Of course, in addition to port terminals, extreme heat, drought, or floods can restrict access to roadways, railways, and waterways, impacting every mode of transportation.
So, the need for companies to be agile and adapt supply chains in order to continue to produce goods and conduct trade is of paramount importance.
WILL EXTREME WEATHER AND POWER OUTAGES IMPACT YOUR SUPPLY CHAIN?
Further, as climate change causes more extreme weather events, blackouts and power grid failures are on the rise.
Ironically, some of the most energy-rich countries on earth – in the Middle East and North Africa, recently imposed rolling blackouts as blistering heat soared as high as 122-degrees Fahrenheit. Outsized electricity demand overwhelmed aging power networks – in some cases for weeks.9
In the US, Texas leads the nation in energy production. Yet, during a severe cold snap in 2021, NXP, a semiconductor producer, lost power at both of their wafer-fabrication facilities in Austin and simultaneously faced a significant curtailment of natural gas and water supply. Even after utilities were fully restored, fab production was down for several weeks as the company verified that every piece of equipment was operational and met stringent quality standards before operations could resume.10
Fortunately, NXP was well prepared with contingency plans and met the challenge with flying colors. Of note, the event in Texas impacted other semiconductor manufacturers as well as their vast web of suppliers and businesses that support the chip industry in that region.
Across many industries, interconnected businesses often cluster in a geographic concentration to increase the productivity with which companies can compete nationally and globally. The aggregation of talent and resources is increasingly common and often provides a competitive advantage.
But, as weather systems intensify, a single extreme event affecting one regional cluster may have a global impact on supply chains.
Plus, the stark reality that the most energy-rich regions of the world are themselves vulnerable to power cuts is an eye opener to the rest of the world. How certain are you that your suppliers have resilient power grids that will hold up in extreme weather conditions?
MEASURING SUPPLY CHAIN EMISSIONS IS HARD, BUT SOON MAY BE REQUIRED
Supply chain emissions account for 11.4x that of a company’s direct emissions on average, according to CDP, an international non-profit that helps companies, cities, states, regions and public authorities disclose their environmental impact. Yet, currently, just one in every ten companies includes climate-related requirements in supplier contracts.11
Supply chain emissions fall into a category of indirect emissions known as Scope 3 emissions. According to the World Economic Forum, “measuring Scope 3 emissions involves tracking activities across the entire business model – or value chain – from suppliers to end users.” Despite the complexity of cutting Scope 3 emissions, a growing number of companies are promising to do so.12
According to the CDP, more than 18,600 companies around the world disclosed climate change data to the organization in 2022. Of those, 36% plan to incorporate sustainability KPIs into their purchasing process by introducing contractual requirements of suppliers within the next two years.13
If you have yet to do so, it is wise to start the process of developing a plan to measure Scope 3 emissions. The EU’s Corporate Sustainability Reporting Directive (CSRD) dictates that large companies operating in Europe will need to report on Scope 3 by 2024. In the US, the Security and Exchange Commission’s proposed climate disclosure rule changes could require publicly traded companies to report Scope 3 emissions in the coming years. Some US states are also exploring regulations that require these measurements.14
WHAT ELSE CAN SUPPLY CHAIN MANAGEMENT DO TO ADDRESS CLIMATE CHANGE?
Before these regulations are enacted, the onus may be on you to create a sense of urgency in your business regarding how climate change will impact your supply chains.
Experts advise supply chain pros to expand their understanding of risk in order to factor in the location, type, and timing of potential threats. Knowing how these various factors play into a supply chain and how they are interrupted by extreme weather can shorten a company’s response time during a crisis.
However, there is a caveat. It’s one thing to develop a contingency plan. It’s another to have the insight needed to know when to activate the plan. Risk planning should anticipate what events can trigger a supply-chain correction so you can manage incidents in real-time in order to meet customer demand and reduce losses.15
If you have yet to do so, this may be the time to engage with suppliers regarding emission measurements. Prepare them for what’s to come. According to a recent article in Supply Chain Management Review, you want to be proactive in collecting and analyzing information so you can start harnessing data-driven insights to address the climate change impacts of your supply chain.
Also, be sure to incorporate climate-resilience strategies into your larger supply chain resilience planning. For example, you may choose to diversify sourcing locations to reduce risk exposure, invest in more robust weather-resilient infrastructure, and develop storage and distribution methods that adapt to changing conditions.
Finally, whenever possible, connect with other professionals outside of your organization to share climate-resilience knowledge. This collaboration may allow for sharing best practices and innovative solutions. By working together, companies can more effectively respond to the challenges posed by climate change and ensure the continuity and resilience of their operations.16
SSI FREIGHT AUDITS PROVIDE SAVINGS, A BENEFIT IN ANY CLIMATE
As you factor in climate change to your supply chain resilience planning, we encourage you to outsource your freight audit and freight payment to SSI.
For global, regional, and U.S. shippers, across all modes of transportation, SSI applies an automated, customized freight audit.
Because our process scales and flexes with your changing needs, you will save money as you adjust supplier and transportation networks to improve performance or reduce emissions. Many of our clients achieve an 8:1 ROI (achieving 8 dollars in savings for every dollar invested into the service). Others realize even more impressive ROIs.
SSI also offers shippers other valuable services. To learn about the many ways in which our team can save you money, improve efficiencies, and help you succeed, contact us.
Footnotes:
1. Alejandra Borunda, “Just how hot was July? Hotter than anything on record”. August 14, 2023, as published by NPR.
2. Georgina Rannard, Erwan Rivault, Jana Tauschinski, “Climate records tumble, leaving Earth in unchartered territory – scientists”. July 22, 2023, as published by BBC News.
3. Lori Ann LaRocco, “’This is going to get worse before it gets better’: Panama Canal pileup due to drought reaches 154 vessels”. August 9, 2023, as published by CNBC.
4. Ana Swanson and Keith Bradsher, “Climate Change Could Worsen Supply Chain Turmoil”. September 8, 2022, as published by The New York Times.
5. Chris Isidore, Amanda Watts, Judson Jones and Brandon Miller, “Another supply chain crisis: Barge traffic halted on Mississippi River by lowest water levels in a decade”. October 8, 2022, as published by CNN Business.
6. Editorial staff, “What happens when extreme weather hits several places at once?”. July 19, 2023, as published by The Economist.
7. Ayurella Horn-Muller, “The climate wrecking ball striking food supply”. August 7, 2023, as published by Axios.
8. Marko Kovacevic and Sarah Lahti, “Supply Chains Need to Adjust Now to New Global Factors”. July 21, 2023, as published by Supply Chain Management Review.
9. Chao Deng, “Brutal Summer Heat Tests Ability of Energy Exporters to Keep Their Citizens Cool”. August 15, 2023, as published by The Wall Street Journal.
10. Steve Frezon, “Through the Storm: The Complex Process of Restarting a Semiconductor Facility”. March 22, 2021, as published in a blog post on the NXP website.
11, 13. CDP website, “Scoping out: Tracking nature across the supply chain – Global Supply Chain Report 2022”. March 2023, as published by CDP.
12. World Economic Forum website, “What is the difference between Scope 1, 2 and 3 emissions, and what are companies doing to cut all three?”. September 20, 2022, as published by the World Economic Forum.
14. Marion Verles, Forbes Business Council Post “Establishing An Effective Scope 3 Reporting Process”. May 5, 2023, as published by Forbes.
15. Mark Herrington, “Climate Change Is Causing Supply Chain Disruptions: How Businesses Can Prepare”. August 15, 2022, as published by Supply & Demand Chain Executive.
16. Vikram Srinivasan, “From Peril to Preparedness: Navigating Supply Chains Amid Changing Climate Dynamics”. August 16, 2023, as published by Supply Chain Management Review.
SSI blog post entitled: Climate change will impact your supply chains.