How Climate Change Will Impact Global Supply Chains
Global supply chain issues have hit the news recently as the COVID-19 pandemic has laid bare the true vulnerabilities of global supply chains dependencies and sourcing relationships. As a result, it has become abundantly clear that we cannot take global production for granted.
COVID is not the only global event threatening supply chains. As climate change continues to worsen, natural disasters are becoming more frequent, thereby increasing extreme weather events that threaten the stability of global supply chains.
This article examines how climate change may impact global supply chains, and addresses the question of whether truly international supply chains are a thing of the past.
Is Your Supply Chain at Risk?
As it stands now, global supply chains lack resiliency. There are three related reasons that help explain how global supply chains are putting themselves at risk.
Reliance on Single Suppliers: Reliance on a single source or supplier means that when that area faces any problems, the whole chain is disrupted. Many sectors have specific companies they rely on heavily, which creates vulnerability to climate change-caused disruptions.
One of the clearest examples of reliance on a single supplier is in semiconductor manufacturing. The Taiwan Semiconductor Manufacturing Company (TSMC) is responsible for creating an extremely large percentage of semiconductors, a crucial part used in many electronics. Reliance on TSMC as the sole source of semiconductors puts global electronic supply chains in a risky position. This is because, if TSMC were affected by climate change, semiconductors would be very difficult to obtain.
High Geographical Concentration: Many companies rely on suppliers in a single geographic location, which poses a risk if that location experiences a natural disaster.
For example, many companies rely on suppliers in the western Pacific for sourcing of a variety of electronics components. However, these areas are increasingly prone to hurricanes, and are projected to be two to four times more likely to experience hurricanes by 2040.
Reliance on geographically distant suppliers can make transport of goods more difficult as climate disasters increase. Additionally, long transport distances contribute to climate change, as this increases carbon emissions from transportation.
No Backup Inventory: Some companies rely on “just-in-time” production processes, which avoids creating large inventories ahead of time and instead creates products to meet customer demand. When sourcing, production or transport is interrupted, it’s impossible to get products to customers without a backup inventory.
While these strategies have worked for many years, as climate change continues, we are beginning to see the flaws in the current supply chain processes. Climate change will continue to cause problems, described below.
What Risks Does Climate Change Pose?
There are several problems climate change creates that may severely impact global supply chains.
Increased Extreme Weather Events: Climate change is increasing the frequency of extreme natural events such as wildfires, drought, hurricanes, and flooding. According to many studies, we can reasonably expect these extreme events to continue, and potentially to become more frequent, as climate change worsens. This is likely the largest risk posed by climate change to global supply chains.
All of these natural disasters impact global supply chains, as they may close ports and slow production of important resources and products. Recently, Hurricane Ida caused large disruptions to the supply chain, as the storm caused the closure of several ports and cut oil production in the U.S.’ Gulf of Mexico. The hurricane also placed increased strain on trucking, which in turn affected shipment of products.
Increased Sourcing Problems: Climate change is increasing resource scarcity. A lack of important resources could severely impact sourcing and production of goods.
For example, climate change is reducing access to freshwater. According to several studies, fresh water sources are becoming less available as a result of increased temperatures. For example, droughts are becoming more frequent. Additionally, as sea levels rise, freshwater sources are increasingly becoming more saline due to flooding and overuse of freshwater aquifers.
Many products are manufactured using natural resources that may become increasingly scarce due to climate change. Once again, semiconductors provide a good example of supply chain vulnerability because they are extremely reliant on large amounts of water, both to produce semiconductors and to create electricity. While some the semiconductor industry has begun reducing water waste, a 2019 study shows that water usage is still increasing as semiconductor technology evolves.
Conclusion: How Can Businesses React?
Global supply chains are likely not a thing of the past, but there are several actions global companies should take to reduce the vulnerability of their supply chains.
Both climate change mitigation and adaptation are crucial aspects of companies’ response to climate change. Climate mitigation means working to slow climate change, while adaptation means responding to the “new normal” of climate change and developing strategies to reduce resulting risk and harm.
Mitigation: Increased sustainability of supply chains will be a crucial part of fighting climate change before it becomes impossible to address. While there are a number of supply chain aspects companies can address in order to become more sustainable, such as transportation emissions, many large companies have not yet begun to implement these strategies. Companies must begin implementing environmentally responsible supply chains and supplier oversight through a variety of strategies in order to slow climate change.
While climate change mitigation may require initial financial input from companies, ultimately they will benefit from reduced risk to their supply chains.
Adaptation: There are several strategies companies can take to reduce their vulnerability to increased climate disasters. These include:
- Creating emergency plans for climate disasters occurring at factories to increase response, and creating disaster-resistant factories through sound planning and structural audits
- Diversifying sourcing of crucial resources to multiple geographic locations and multiple suppliers
- Ensuring a “safety stock” of materials or products is available so that if a natural disaster strikes a supplier, a backup is available.
- Embracing a circular economy, in which materials are reused and products are made to be recycled, in order to reduce stress on increasingly limited resources. For example, the semiconductor industry can reuse water to reduce water usage.
In summation, climate change will impact global supply chains, but this does not mean global supply chains are necessarily obsolete. Instead, companies today must take action to create mitigation and adaptation plans in order to confront climate change’s effects on supply chains head on.