- Supply chains are at risk from climate change.
- The Sustainability Consortium and HSBC partnered to create 8 bridging and buffering strategies to mitigate risk.
- Bridging strategies are planning, financing, and building strong relationships between buyers and suppliers.
- Buffering strategies are fortifying inventories, knowledge, capacity, cost and liability.
- Layering the strategies together is the best way to build strong and resilient supply chains.
Climate Risk is Supply Chain Risk
Supply chains are vulnerable to a wide range of risks. Our increasingly connected world is exposing its cracks as conflicts, pandemics, and disasters are now sending shocks throughout the world, not just in the regions they are located. From a business perspective, this means that the physical areas of potential risks have expanded– and as our world’s climate becomes more unpredictable, the scope of types of threats has also increased. These climate risks add to the dark clouds of piling hazards that could harm your business. While it may seem overwhelming, you have the power to understand them and plan to mitigate their impacts.
The stoic beasts of America’s Great Plains are strong and built to weather storms. When a blizzard rolls through, buffalos take it head-on. Utilizing their thick fur and back hump, they lower their horned heads and plow through the snow, leaving a trail for other animals to follow once the weather subsides. If you run from a storm, you prolong its duration. When you push through a storm, it blows by quicker. You want your business to be a buffalo. Equip the right tools, take problems head-on, and pave the way for your suppliers, buyers, and partners to follow safely. Climate risk has many potential storms (literally and figuratively) that can hinder your business; however, by knowing where risks are and utilizing the eight bridging and buffering strategies laid out in this article, you can help turn your supply chain into a business buffalo.
Building Bridges and Buffers
The Sustainability Consortium worked together with HSBC to compile a list of eight strategies for supply chain resilience to climate risks. There are two types of strategy: bridging and buffering.
Bridging strategies help build relationships within your supply chain by enabling suppliers to continue operations or recover quickly should a shock cause disruption. The report states three main bridging strategies:
- Coordination of risk awareness and planning
- Providing financing or expertise
- Strengthening the buyer-supplier relationships
1. Collaborative Planning and Control
Planning is a great tool you can use to mitigate the impacts of disruptions or even avoid them altogether. By working with your suppliers, you can exchange knowledge about climate change risks that each is facing, along with any expertise you have in that area. Once you understand each other’s strengths and weaknesses, you can collaboratively create a joint contingency plan. Working together can create synergies and deeper ties that can lead to better results, even without a supply chain disruption.
2. Financial Support
Mars and Coca-Cola partnered with Business for Social Responsibility to finance resilient living conditions for their most vulnerable upstream supply chain suppliers. Providing suppliers with financial support can build their resilience or recovery time during disruption events. By investing in your suppliers, you support your business by securing the steady flow of goods your business requires to function.
3. Strengthen Relationships
Building trust between your company and your suppliers is essential to building resilience to climate risk since it can improve future collaborative planning. Some examples include joint ventures and long-term contracts that solidify your bond.
Implementing buffering strategies can give your business enough time and space to mitigate the economic effects climate risk might create. By allowing parts of your business to stay afloat during emergencies or shortages, having buffers in place might be the thing that saves your company from bankruptcy.
4. Inventory Buffers
Also known as safety stocks, companies often have product reserves in case of production disruption. Due to the uncertainty associated with future risks, it’s always a good idea to keep extra of what your business relies on for the worst-case scenario. Creating an inventory buffer could include increasing your emergency stock or productivity before disaster strikes. Especially if you are a supplier, having surplus stores of your product could allow your business to continue distribution operations even if your supply chain or production operations are disrupted.
The world has been warned of the consequences of climate change since the 1950s. Since then, countless articles and reports have predicted how we might see climate change affect different geographies and resources. Everything from food and water to chemicals and human capital will be affected by rising temperatures, and this will be reflected in our supply chains. The silver lining is that at least we’ve been warned. We know what’s coming. And although the window of action is shrinking, there is still time to protect your business from the systemic consequences climate change will bring forth. Depending on your industry and business type, you require different resources to operate. Understanding how the availability of these resources will change will be paramount in making strategic and healthy long-term decisions for your company. And if you play your cards right, you might be able to rise above your competitors by understanding and acting on the very real challenges climate change is creating.
Whenever disaster strikes, one of the most critical skills a company can have is flexibility and the capacity to think and act quickly. When your supply chain is about to fall apart, it’s imperative that you are swift and decisive and can pivot towards establishing a backup supply chain. Although establishing a new supply chain doesn’t happen overnight, having contacts, plans, and fast decision-making could be the difference between staying afloat or not. In 2000, a technology manufacturing plant in New Mexico caught on fire. Both Nokia and Ericcson were affected by the significant gap this crisis was leaving in their supply chain. The difference between Nokia and Ericcson was that Nokia quickly started conversations with other technology manufacturers and was able to cement partnerships before Ericcson, allowing Nokia to get priority deliveries and prices.
As the risk of climate change becomes more evident and material, both suppliers and purchasers must be very clear about the consequences of supply chain disruption in case of climate-induced force majeure. By being very clear about what is or isn’t a climate-related disaster event, both parties can protect themselves from possible liability caused by failure to deliver.
As of 2021, 27 countries have implemented a carbon tax, with 64 other initiatives in the works. In the U.S., the SEC just proposed a new reporting initiative that would require companies to disclose their climate-related financial risks. This is all to say that carbon is expected to become quite expensive. Since most companies’ emissions are mostly (>85%) coming from their supply chains, unless you want to be paying big bucks, we recommend you start looking at how you can reduce your supply chain’s carbon footprint.
Layering Strategies Builds Strength
Now that the different strategies your company can implement to hedge against supply-chain climate risk have been discussed, you might be wondering how they can work cohesively to drive better results. One helpful analogy is COVID-19 and the different ways protective measures work together to deliver maximum protection. Although wearing a mask is a great way to protect yourself and others, it’s not impervious to failing. That’s why it’s essential also to get a vaccination, keep social distance, and only be around others outdoors. Layering different protective measures ensures that you’re as protected as possible. In the same way, implementing bridging and buffering strategies can ensure you maximize your protection against supply-chain risk.
Take the First Step
Because climate change will open vulnerabilities within your business’ supply chain, there is no time to waste in addressing the climate risks that threaten it. Understanding the climate risks that your suppliers’ are exposed to is the first step to mitigating them. The next steps are to invest monetary and human capital in planning and preparing your suppliers for the risks through bridging strategies, along with increasing stocks, knowledge and capacity, while clarifying liability though buffering strategies. The most beneficial use of the strategies will be through implementing not just one, but all that are applicable. Today can be the day that your business begins the journey of creating a climate resilient supply chain.
Where to Begin?
To get you thinking about how you can implement the eight strategies, the Sustainability Consortium and HSBC created these eleven questions: