Climate Change to bring new pressures on supply chains

Roger OakdenLogistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

Operations strategy

The past twenty years

Individuals change their behaviour due to an event that affects their lives. It appears likely that by 2030, the event that will affect all people is crossing the 1.5C temperature barrier. This event will focus minds on actions to be taken that might slow the increase in temperature. This will change demand patterns for goods and services.

Over the past twenty or more years, the growth of economies in developed nations has been enabled by low inflation and three ‘low costs’ – labour (as a percentage of Value Added), goods (increasingly from China) and energy (especially gas from Russia to Europe). This era has ended.

Strategies developed by larger business in the previous era were often considered under the theme of ‘Globalisation’. For the new era, the theme appears to be ‘Security’, with political and commercial decisions concerning ‘critical’ items viewed through the prism of domestic security risks, such as vulnerability and threats.

Opportunities and Risks in the future

However, there will also be opportunities for businesses. Risks and opportunities in the new era are summarised under the heading of 4Ds: digitalization (of business sectors), dislocation (of markets), diffusion (movement of people) and distribution (of energy). The list is taken from an investment newsletter but is applicable to supply chains.

Digitalisation was discussed in the previous blogpost. It has the potential for change through the application of data to the way people and organisations interact. Potentials from digitalisation are small businesses that go to market via a ‘platform economy’ digital hub; financial markets becoming more decentralized within regions and new production and distribution technologies that enable some products to be efficiently made for local markets.

Dislocation of markets can occur due to Digital Transformation (also discussed in the previous blogpost). An example is the spread of ‘xxx as a Service’, whereby a previously ‘face to face’ encounter is conducted online – think medical appointments, education and interactions with government departments. Dislocation will also likely occur due to Climate Change as the sources of energy and food change. The BBC recently noted that “the world will need an estimated 60 percent more wheat by 2050, as the population increases. But each 1°C rise in global temperature will cause an estimated reduction of more than six percent in the amount of food that can be grown around the world. The ‘green revolution’ in the 1950s and 1960s allowed farmers to grow varieties of wheat that produced the most grain. Other varieties were put aside – including those able to cope with weather extremes, so the diversity of wheat was reduced”.

Diffusion of people from their current to new living spaces can also dislocate markets. In developed countries, COVID19 was the reason for some people moving from cities to rural areas, aided by the ability to work from home. If this cohort is the most active at using eCommerce, the cost of ‘free’ delivery could challenge the business model of eCommerce companies. A bigger Diffusion threat is the movement of large numbers of people due to climate change. Coastal areas are threatened by rising sea levels. River valleys are under threat from flooding, but also drought, if they rely on snow melt from mountains. This year, the three main commercial rivers, – Rhine, Yangtze and Mississippi were all affected by low water levels.

Distribution of energy refers to the electricity grid, renewable energy, electric vehicles (EVs) and much more, becoming a major enabler for business and market initiatives. In a scenario where net zero is reached by 2050, the world’s energy system and current emissions-intensive equipment and infrastructure, must be re-engineered. The consulting firm McKinsey has noted that for this to occur, annual capital spending on equipment and infrastructure with low emissions intensity, will be more than two-thirds of total annual capital spending. This means that spending on current capital items will reduce. These low-emissions investments will include technologies, identified by McKinsey and others as (in alphabetical order):

Climate Technology groups

  • Agriculture and food e.g. precision planting and water use, regenerative agriculture, animal feed recipe to reduce methane gas
  • Building technologies e.g. low energy homes and commercial buildings (e.g. warehouses); electric heating and cooling (heat pumps)
  • Carbon removal, capture and storage (CRCS)
  • Circular economy – repurpose items rather than dispose; alternative packaging materials; wastewater management
  • Energy Efficiency e.g insulation products; geothermal materials; electrical switches, lighting and metering technology
  • Energy storage e.g. batteries, pumped hydro
  • Hydrogen e.g. electrolysers, fuel cells
  • Industrial processes e.g. green steel and cement produced using renewable energy
  • Monitoring and verification of carbon gain and loss
  • Transport e.g. electric vehicles (EVs), hydrogen vehicles, autonomous vehicles
  • Renewable power generation (solar, wind, hydro) and electricity grid enhancements for distributed power
  • Sustainable fuels e.g. biofuel

Time to implement technologies

Most of these climate technologies are currently developing a global scale. They will increasingly require more capital, skills and supply chain resources, that will influence how other supply chains respond. Three features of climate technologies were identified by McKinsey, that will also have an influence:

  • Climate technologies are highly interdependent. For example, building capacity that generates and stores renewable electricity must be done concurrently with establishing end user markets
  • The interdependence of climate technologies means that scaling them requires sellers, buyers, transport organisations, financial firms and governments to work together – a new experience for many
  • The early formation of a supply chains network for a climate technology can help it to become entrenched as an industry’s solution of choice

Change of any type takes time to design and implement. While behavioural changes in business have fashion cycles (for example, total quality management (TQM) and modes of working), if technologies must be incorporated, the acceptance will take longer. Think barcodes at about 20 years before general use and RFID at about 25 years from first patent to commercial off the shelf (COTS) equipment. Artificial Intelligence has been in development (and use for specific purposes) for about 30 years, but the research firm Gartner does not see its general acceptance in supply chains until after 2030.

As the pressure for climate technology solutions becomes more urgent, we can expect acceptance to be quicker. So, supply chain professionals need to review potential pressures on their operations in a post-2030 world, to ascertain if and how the emphasis on climate technologies will affect their organisation’s supply chains.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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