Commentary: What does the National Climate Assessment say about future risks for supply chains?

Here are three themes from the Fourth National Climate Assessment, Volume II: Impacts, Risks and Adaptation in the United States that I think are most relevant for people who manage and operate supply chains.

Climate change presents a systemic risk

Climate change will have adverse impacts that will be felt across the United States’ economy. The situation in California, and in parts of the midwestern United States’ provide a microcosm of what lies ahead.

Last November, California’s Camp Fire was a constant fixture on daily TV news. According to the Insurance Information Institute:

• It broke out in Butte County, in northern California on November 8.
• It burned 153,000 acres and destroyed 18,800 structures.
• It burned 14,000 residential and 530 commercial structures.
• The town of Paradise was destroyed by the fire.

Other reports indicate that the fire wasn’t contained until November 25. According to Munich Re, the Camp Fire resulted in total losses of $16.5 billion, with insured losses of $12.5 billion. This made it the costliest natural catastrophe of 2018.

This year Pacific Gas & Electric is proactively shutting off electric supply to its customers during periods of extreme temperature. This is its attempt to try to prevent a repeat of the 2017 and 2018 wildfire seasons in California, for which it is facing ruinous liabilities. This is an uncertainty that manufacturers and other producers in northern California did not prepare for, but for which they now need to create contingency plans.

Record rains and flooding in the Midwest have devastated agricultural and food supply chains linking some of the United States’ most productive agricultural regions with other parts of the country, and the rest of the world. What food production remains after the heavy rains and flooding is negatively affected by disruptions in transportation networks, as roads, rail lines and other critical transportation infrastructure is rendered unusable for sustained periods of time. This exacerbates the problem by making it more difficult, and more expensive, to get the agricultural produce that has not been destroyed to market.

Climate change creates an interconnected, cascading and cyclical source of uncertainty for supply chains

Supply chains connect suppliers and producers with their customers and consumers through a complex web of interconnected and mutually dependent linkages and intermediaries. A failure at any single node in the supply chain can create risk for every other node in the supply chain. For example:

• Rising sea levels affect the maritime shipping industry, potentially affecting ports as well as affecting ships at sea. In turn, this affects truck and rail service providers that move goods inland from the ports.
• The shifting, unpredictable and increasing severity of storms makes it more and more difficult to adequately plan production and delivery schedules with high levels of certainty in global supply chains. This makes production more costly for suppliers and producers, and it is not always possible to pass the extra costs along to end customers or consumers.

Global supply chains have become so complex and intertwined that it is difficult to predict precisely how exogenous shocks will affect the entire supply chain. This problem will become more acute as adverse weather events become more frequent and extreme.

Transportation faces risks; risks that affect everything else

Transportation is a fundamental part of how supply chains function. As such, any factors that have an adverse impact on transportation networks will have an adverse effect on supply chains as well. Moreover, within supply chains, transportation and logistics fulfill the function of connecting producers and suppliers with customers and consumers. To quote from the Fourth National Climate Assessment: “Transportation is the backbone of economic activity, connecting manufacturers with supply chains, consumers with products and tourism, and people with their workplaces, homes and communities across both urban and rural landscapes. However, the ability of the transportation sector to perform reliably, safely and efficiently is undermined by a changing climate.”

Decision-making under uncertainty

The bottom-line is this – any company or entity responsible for operating or managing supply chains needs to build up the capacity to make decisions under uncertainty.

This is an area in which established companies and emerging startups can collaborate for mutual benefit.

Startups building predictive models usually lack a corpus of data on which to train their models. On the other hand, established companies in mature industries often lack the knowledge to build the sort of software required to perform stochastic analysis to support decision-making in real time.

Government agencies can help too. Government agencies at every level collect vast amounts of data about the economic, social and physical environment. This data could be organized and made available to academic researchers, startups and other businesses for free, through application programming interfaces.

Such data will help startups and companies build better predictive models by combining information gathered by the government agencies with data collected by the private sector. This will not solve all the problems posed by climate change, but it will make it easier for businesses and society to respond and prepare for the unknown challenges that lie ahead.