A company’s resilience to climate change depends on its risk management approach, business plan and governance structure. Unfortunately most companies do not have access to the appropriate climate data to properly plan and reduce their physical climate risk.
Physical climate risk impacts not only facilities, but also supply chains, distribution networks, customers and markets.
Supply chains are very vulnerable to natural disasters brought on by rapid climate change. Wildfires in California shut down rail lines and trucking routes; in 2016 flooding shut down major refineries in Louisiana. In 2014, of the top five supply chain disruptions, three were due to natural disasters. The top three supply chain disruptions resulted in over $15 billion in economic loss and required on average 38 weeks for system recovery.
Climate change is increasing cost of production, reducing speed and responsiveness of delivery and reducing quality of goods and services produced. Further, due to just-in time production and delivery, shelves are not that deep which would mean even slight delays could have a significant impact on the delivery of a product. Companies must better manage the uncertainties of possible major disruptions to their supply chains.
Assessing Supply Chain Risk
Companies are continually assessing their supply chain in regard to political, regulatory, market and technological factors. An unforeseen shift in any of these areas will put supply chain at risk and put a company’s ability to provide its products and services in jeopardy.
Weather is also considered in short-term to mid-term supply chain considerations. With this data companies may look for other suppliers or go to the financial markets and hedge their bets with weather derivatives. For example, if the weather forecasts suggest a more active hurricane season in the Atlantic, then a company reliant on supplies that travel the Atlantic, may diversify their supply chain by looking for domestic sources. Specifically, the auto manufacturer GM has an active crisis center watching the weather and adjusting its supply chain in anticipation of extreme weather events. This proactive forecasting activity only allows for short-term adjustments to the supply chain. Unfortunately this activity is ad hoc, short sighted and ultimately inefficient in the long-term.
Yearly adjustments and investment in the supply chain without a long-term understanding of weather and climate trends is problematic. Instead of this approach, companies should begin to better understand their mid to long-term physical climate risk. This is not to supplant short-term forecasting, rather it supplements the forecasting. If a company knows that it should anticipate a long-term increase in hurricane activity in the Gulf of Mexico, it should plan for a long-term investment in other sources for its supply chain. Rather than only seeing a year ahead, a company can look several years ahead and invest in sources that are at less risk to weather events. This also sends a signal to current suppliers that they may need to shift production to another location and diversify their customer base.
How to reduce supply chain risk?
There are a number of ways to protect your supply chain from physical climate risk. Here I will focus on the production side of the supply chain. I will cover transportation in a later post.
Because most of the population lives close to the coast, sea level rise, storm surge, flooding and hurricanes are a growing risk. Purchasing or building a facility in a coastal location that does not have the infrastructure to mitigate coastal flooding risks is not a good idea. According to a recent Insurance Journal article, sea level rise places $1 trillion worth of properties at risk, 117,000 commercial properties, from chronic flooding. These coastal areas are anticipated to be “chronically inundated” by the end of the 21st Century.
Built Infrastructure Can Reduce Risk
When considering partnering with a supplier or purchasing/constructing an asset along the coast there are a few basic things to consider. (Check out the Fortified building codes to see what else should be done.)
First, are the site’s system protected? This includes mechanical and electrical systems. It has been normal practice to place electrical and mechanical systems on the first floor or in the basement. Recent flooding events have demonstrated this to be a very poor idea. Buildings that have been recently flooded and rebuilt are placing these systems at least on the second floor. Buildings in coastal areas should also consider the installation of a flood wall or barrier system to reduce likelihood of flood water inundation. The University of Texas Medical Branch in Galveston is an excellent example of a site that has both elevated mechanical systems and built a flood wall to reduce physical climate risk.
Some coastal sites are bringing in fill dirt to raise the height of the property above a particular flooding level.The elevation of land may work, but there could be some significant environmental and social costs associated with this approach. The elevated site may exacerbate flooding in surrounding facilities and communities. This should be taken into account because protecting yourself physically without taking into account harm to neighbors could result in some significant reputational risk, which may result in things from boycotts to regulatory/policy changes that may impact business.
The best approach may be to locate away from coastal areas. This may increase some transportation costs to get goods to the docks, but this cost is likely to be outweighed by the decreased risk of business disruption due to flooding.
Reducing Risk of Electric Power Disruption
The second resilience factor to consider is power supply. When working a supplier or building/purchasing a new site, pay attention to the electric power supply. Does the site have on-site power? I do not mean a diesel generator that stands idle and may or may not operate when called upon. Rather, I am talking a resilient microgrid that provides 24x7 power to the site. Microgrids powered by combined heat and power, solar and battery may be the best approach. The natural gas infrastructure is pretty robust and solar and batteries do not require fuel to operate. In contrast to diesel that has a very finite operational time frame and very risky supply chain.
The reason I suggest onsite power is that the portion of the power system that is most at risk is the transmission and distribution system. This system delivers power from centralized, utility scale power plants to your site. This risk is due to flooding of substations and infrastructure, as well as the significant damage that hurricanes, wildfires, ice storms, straight line winds, etc. can cause to the transmission and distribution system. Other risks include extreme heat and drought. Extreme heat results in power lines reducing efficiency and more importantly drooping. When they droop they have been known to start forest fires. Further, coal, natural gas and nuclear plants that provide much of the power on the grid are reliant on water for cooling. If water is too warm or there is not enough water, power plants derate or shut-off resulting in brown outs and blackouts. With growing evidence that a good portion of the west will see warmer temperatures and more droughts, the risk to the centralized power system and the T&D system grows.
The ideas proposed here move companies away from business as usual. It can be difficult to convince key decision makers to invest in more resilient mechanical systems, sea walls and microgrids. To improve decision making climate models, integrated with economic and market forecasting models can help with the cost/benefit analysis associated with business as usual versus taking a more resilient approach. These models can help decision makers better understand the likelihood and financial impact of mid and long-term natural disaster events resulting in better decision making and a more resilient supply chain.