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Extreme weather events and natural disasters are increasing in frequency and severity due to climate change, presenting novel risks that can severely disrupt manufacturing supply chains. According to a recent World Economic Forum report, environmental events are the top threat to global supply chain operations over the next decade. Manufacturers must take proactive steps to evaluate risks and build resilience or face significant financial and operational impacts. This article examines key strategies manufacturing firms should adopt.
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Extreme weather events and natural disasters are increasing in frequency and severity due to climate change, presenting novel risks that can severely disrupt manufacturing supply chains. According to a recent World Economic Forum report, environmental events are the top threat to global supply chain operations over the next decade. Manufacturers must take proactive steps to evaluate risks and build resilience or face significant financial and operational impacts. This article examines key strategies manufacturing firms should adopt.
Gaining visibility into risk exposure across multi-tier supplier networks is crucial yet challenging. A 2020 McKinsey survey found only 16% of executives have full transparency beyond Tier 1 suppliers. This lack of insight leaves manufacturers blind to over 60% of potential risk exposure on average [1]. By mapping supplier relationships and pinpointing geographic risk concentrations, firms can identify vulnerabilities. Emerging technologies like AI-enabled supply chain mapping and risk sensing platforms can accelerate this process from months to minutes [2].
Insight into supplier networks allows focused monitoring of hazard threats. AI-powered platforms continuously scan global risk data across hundreds of perils to generate risk alerts for assets based on severity and timing [3]. This real-time intelligence gives manufacturers and suppliers lead time to enact contingency plans before disaster strikes. Firms should monitor risk levels across facilities, transit routes, local infrastructure, and surrounding communities.
Risk transparency enables targeted mitigation to minimize operational and financial impact. Diversifying sourcing and production geography reduces over-concentration in high-risk areas [4]. Hardening facilities in hazard-prone locations improves resilience during events. And modernizing business continuity plans and crisis response processes ensures agility when disruptions occur [5]. Integrating these measures builds a supply chain able to better absorb and adapt to shocks.
As climate perils increase in frequency and intensity, traditional property insurance may no longer suffice [6]. Parametric policies pay claims based on measurable hazard thresholds rather than actual losses, enabling rapid payouts for supply chain recovery. Index-based weather derivatives provide targeted risk transfer as well. Manufacturers should partner with insurers to explore these solutions and optimize financial protection.
Climate change multiplies uncertainty and risk for global supply chains. But by increasing visibility, monitoring threats, mitigating vulnerabilities, and transferring excess risk, manufacturers can develop the resilience needed to thrive in the years ahead. Those who fail to adapt will face growing business continuity threats and deepening financial losses.
[1] McKinsey & Company, “Coronavirus: Implications for business”, March 2020. https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business
[2] Anita Balakrishnan, “How AI can enable companies to detect supply chain risks in real time”, CNBC, February 2022. https://www.cnbc.com/2022/02/15/how-ai-can-enable-companies-to-detect-supply-chain-risks-in-real-time.html
[3] Karen Kroll, "How AI and data could help protect supply chains from disruption", Supply Chain Dive, January 2020. https://www.supplychaindive.com/news/supply-chain-artificial-intelligence-data-disruption/570037/
[4] World Economic Forum, “Building Resilience in Supply Chains”, January 2013. http://www3.weforum.org/docs/WEF_RRN_MO_BuildingResilienceSupplyChains_Report_2013.pdf
[5] McKinsey & Company, “Building resilient supply chains”, August 2021. https://www.mckinsey.com/business-functions/operations/our-insights/building-resilient-supply-chains
[6] Lloyd’s Emerging Risk Report - Climate Change: Impacts on Business, May 2014. https://www.lloyds.com/news-and-risk-insight/risk-reports/library/natural-environment/climate-change-impacts-on-business
