Weather-related supply chain risks shouldn’t be ignored
February 20, 2019
As extreme weather events become more frequent, it is more crucial than ever for companies to prepare every link in their supply chain.
The effects of storms like 2017’s Harvey, Irma and Maria; 2018’s Michael; and the devastating California wildfires during both years, were object lessons for risk managers of the impacts that severe weather events can have on supply chain resilience. Especially troubling is that severe weather events are increasing in frequency and severity. Companies are dependent on ports, highways, railroads and airport runways for receiving and shipping raw materials, parts and goods. When severe weather disrupts transportation, a company’s supply chain can be compromised in potentially costly ways.
When you factor in global supply chains, the risks can become even more pronounced. One of the most telling examples occurred in 2016, when Japan was struck by an earthquake that caused several major, domestic automobile and auto parts manufacturers to cease production. The ripple effects of broken Japanese supply chains affected U.S. manufacturers, including one of Detroit’s “big three” being temporarily unable to obtain a paint pigment from a Japanese source key to the finishes of a popular light truck model.
Despite an increasingly global economy, businesses across many industries remain surprisingly dependent on a few sources in a single region, which leaves supply chains vulnerable to extreme weather disruptions.
The World Economic Forum’s Global Risks Report 2019, for which Zurich was a strategic partner, notes that “as environmental risks crystallize with increasing frequency and severity, the impact on global value chains is likely to intensify, weakening overall resilience.” The report further observes that disruptions to the production and delivery of goods and services caused by environmental disasters, such as severe weather events, are up 29 percent since 2012.
In 2017, North America was the region most heavily impacted by severe weather events, notably three major hurricanes in rapid succession and devastating wildfires. Tragically, this trend continued in 2018, including one of the strongest hurricanes ever to make landfall in the U.S. and California wildfires that consumed entire towns and took more than 80 lives.
Despite overwhelming evidence of the disruptive consequences of severe weather events, many large corporations have failed to adequately examine weather-related risks associated with their supplier locations.
According to the Business Continuity Institute’s 2018 Supply Chain Resilience Report, 41 percent of supply chain professionals polled identified adverse weather conditions as the leading cause of supply chain interruptions. This made weather-related events second only to unplanned IT or telecommunications outages (53 percent) as the precipitating factor in supply chain disruptions. Significantly, weather-related interruptions took second place in the BCI’s 2018 survey, up from sixth place in the 2017 report. Supply chain executives are recognizing that severe weather is likely to become a more frequent cause of disruption in the years ahead.
In order to mitigate supply chain interruptions caused by severe weather, or any cause for that matter, supply chain executives and risk managers must take steps to beef up resilience. This means cataloging all key (Tier 1) suppliers — suppliers that provide their products directly to the manufacturer — where they are based and what vulnerabilities they may have. How prepared are your suppliers against disruptions of their own supply chains? It’s also vital to understand that supply chains can be disrupted by more than just physical events, such as a severe storm or earthquake. A cyberattack on a Tier 1 supplier could be as devastating as a hurricane. What security measures do suppliers have in place to mitigate not only severe weather but also a broad spectrum of potential risks?
Understanding your supply chain risks, exposures and their triggers is the foundation of effective risk management. Companies need to go through each value chain and consider the likelihood and potential impact of adverse events. Only then can they start taking actions to mitigate those impacts.