Supply chain scenarios and effects of climate change

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

Petrochemical pollution

Climate change and your organisation

Regardless of your organisation’s business sector, climate related physical events and government policy will increasingly affect your supply chains – suppliers, customers, your facilities, transport, power supply, telecommunications and your employees.

As discussed in the previous blog, addressing climate change risks for your organisation requires strategic choices. Mitigation of climate change can be achieved through saving energy, reducing water use, ensuring that packaging is recyclable and other actions that are internal and under the control of your organisation.

External climate events and consequences that your organisation cannot control are the driver for Adaptation. This requires implementing a risk management process; yet the scope and potential impact of climate change risks has yet to achieve a high profile in surveys of businesses.

Develop scenarios for required actions

Because climate change outcomes are unknown, relevant supply chain scenarios for your business must be developed. The scenarios would consider likely future situations and responses that could influence your organisation’s supply chain structure, operations processes and external relationships.

Scenarios are grouped under two categories of risk:

  • Physical climate risks from extreme weather events and changing climate patterns that could disrupt the availability of raw material and energy supply, supplier operations and communities along supply chains
  • Corporate policy and legal risks including:
    • market risks from changing customer and consumer preferences and demand for low-carbon and sustainable goods and services
    • operational risks from the future pricing of greenhouse gas (GHG) emissions for your business, demand and use of low-carbon materials, revised planning techniques and new technologies
    • reputation risks to the company’s brand image from failure to address climate risks and potential legal action

Examples of supply chain scenarios for an organisation:

  • A supplier of critical components cannot ensure delivery due to power outages from hydro generators caused by drought in their country
  • A major seaport (identify) is extensively damaged by a destructive storm and will take three months to fully recover, although partial services could be resumed in one week
  • A facility owned by a 3PL and used for distributing your organisation’s products is located in a (future date) flood zone
  • If ‘x’ event (define) occurs, would customer/consumer buying habits change and how might that affect your supply chains?

Some questions concerning the impact of a scenario on:

  • material and, intermediate items availability and cost
  • logistics services provided to the organisation
  • movement and storage of items through (identified) supply chains
  • corporate and Logistics Services Providers infrastructure needs and locations
  • technology selection and implementation
  • knowledge sharing with external parties
  • customer and: consumer value perceptions concerning your products and services
  • supply chain organisation structure – domestic, regional and international

To analyse and debate scenarios requires a reasonably accurate depiction of your organisation’s supply network – called the supply network map. The core elements of the supply network are:

  • Nodes – each location which holds material items or money. Details of core suppliers and customers at their respective locations
  • Variables – factors that can change the physical or financial values at a Node
  • Links – transport movements of material items between Nodes
  • Flows – transfer of money, data and information between Nodes, Variables and Links. Contractual responsibilities with suppliers and customers

Inputs to the network map include:

  • Locations of actual supply and delivery points (not the location for orders)
  • Ownership, influence or control situation (i.e. levels of power) at critical nodes and links and the effects on capacity from demands of customers
  • Shared constraints (production capacity, inventory levels)
  • Alternative routing through each supply chain and
  • Planning policies for each item at each stock point

Based on information within the supply network map, identify:

  • inventory levels required to addresses different forms and functions in the business
  • depth of visibility available through individual supply chains
  • expected Time to Recover (TTR) if critical supplier nodes or transport links become unavailable and
  • flexibility of the organisation’s supply chain group in responding to major events

The value of Scenario Planning is in discussions concerning options, likely consequences and risks. To support the discussions (and to provide a comparison of outcomes), assessment of scenarios is done using tree diagrams. This identifies options and assumptions for each scenario, which are used as input for the subsequent risk analysis and discounted cash flow (DCF) calculations.

After considering the range of scenarios, a scoping document can be developed. This identifies such things as alternative: suppliers, routing through transport points, storage locations and supply chain organisation structure and indicative times for implementation.

Scenario techniques have been developed from the 1970s when they were used to address a complex and uncertain environment concerned with the availability and price of oil. The technique is therefore beneficial when considering climate change risks.

To identify the range of climate change risks for supply chains, universities, professional organisations and industry bodies should sponsor discussion events. Here, risks are identified and a list published for use in structuring organisation specific supply chain scenarios.

Scenario Planning is a two or three day (preferable) residential workshop, using an external facilitator (to ensure that discussions do not default into just costs and benefits). There are about 12 participants (from supply chains and other functions), formed into three teams to develop scenarios, identify options and assumptions and evaluate their risks. Scenario Planning can use software tools developed for the Supply and Operations Planning (S&OP) process, as both require a similar tool for quick manipulating of data within scenarios.

Challenge to implementation

The biggest challenge when developing the action program is not constructing the supply network map, nor identifying the climate change risks and adaptation actions. It is selling the ‘solution’ to your CEO and senior executives.

Selling change that may only be reluctantly accepted and then to be responsible for implementation can be a ‘career limiting’ role. In response, a position that some supply chain professionals will take is to wait for the CEO to announce a ‘review’.

But waiting this long may be too late against competitors who have responded to the challenge. Climate change is a threat which can be turned into opportunities – it is not an event that cannot be considered because the costs are too high!

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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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