By Marius Haag
Supply chains have always faced vulnerabilities, with disruptions arising from a variety of factors, including geopolitical tensions, natural disasters, and market fluctuations. Historically, companies have experienced supply chain interruptions lasting one to two months in a span of 3.7 years on average. In the consumer goods sector, these disruptions can result in EBITDA reductions of up to 30% (McKinsey Global Institute).
With the accelerating impact of climate change, global supply chains are facing new and increasingly unpredictable threats. As climate change progresses, global supply chains are facing a new and ongoing challenge that will consistently threaten smooth and reliable operations. In 2023, economic losses from natural catastrophes were estimated at $280 billion (Swiss Re Institute). Looking ahead, by 2030, productivity losses of up to $2 trillion are projected (UNDP). These losses signal an urgent need for supply chains to evolve in response to growing environmental risks.
How climate change effects supply chains
Extreme weather events – such as flooding, storms, heatwaves, droughts, rising sea levels, and cold waves – disrupt transportation networks, production, and logistics operations. For instance, flooding can submerge roads, damage rail infrastructure, and cut off access to critical hubs, causing delivery delays. Severe storms and hurricanes disproportionately impact coastal ports, delaying shipments and raising operational costs. Cold waves and snowstorms also disrupt northern transportation routes, hampering the delivery of goods and damaging temperature-sensitive products. Heatwaves, warp rail tracks, and degraded roadways, complicating logistics and damaging key infrastructure. In Southern Europe and the U.S., wildfires triggered by high temperatures often destroy supply routes, severely disrupting movement. Similarly, droughts lower water levels in crucial European rivers, limiting transport capacity and affecting agricultural output. For example, in 2022, low water levels on the Rhine River forced vessels to operate at only 25% capacity, disrupting supply chains significantly (Moody’s).
In addition to these events, climate change is creating more permanent changes in supply chain networks. For example, the continuous drop in lake levels, like in Kazakhstan, is making inland waterways increasingly inaccessible, permanently altering trade routes. Similarly, rising global temperatures are leading to desertification in previously fertile regions, reducing the availability of raw materials and agricultural products. Rising sea levels also threaten coastal ports, requiring substantial investments in infrastructure to mitigate the risks of flooding. These long-term effects can fundamentally reshape supply chains, making it harder to maintain reliable operations.
These climate-related disruptions illustrate the urgent need for businesses to adopt flexible, adaptive, and sustainable logistics strategies to manage the increasing environmental risks. By rethinking supply chains now, companies can mitigate these challenges before they become insurmountable.
Why it’s worth it
Redesigning supply chains to enhance resilience is not just a theoretical concept; it delivers proven results in the face of climate-related disruptions. Take the example of Boeing and Volvo in 2022, when Hurricane Ian caused massive flooding and infrastructure damage in Florida and the Carolinas. These extreme weather events led to the closure of key manufacturing plants, such as Boeing’s facility for three days, severely impacting production lines. Companies like Boeing and Volvo responded by improving their infrastructure and rerouting supplies, demonstrating how proactive measures can mitigate the impact of climate events. Similarly, Nissan faced significant disruption when floods in central China in 2021 shut down several of their manufacturing facilities. The company had to reevaluate its logistics and diversify sourcing to bounce back more quickly (MarshMcLennan).
These examples show that embracing technology and strategic planning can make a profound difference when navigating disruptions – whether from extreme weather or broader climate-related events.
What makes supply chains resilient?
A resilient supply chain is one that can absorb and recover from disruptions, adapting quickly to unforeseen challenges like natural disasters, market fluctuations, or geopolitical events.
- Transparency is a key factor, providing real-time insights into the flow of goods and risks, allowing companies to make proactive decisions. Technologies such as IoT, RFID, and predictive analytics significantly enhance visibility.
- Flexibility refers to a supply chain’s ability to adjust and reconfigure its sourcing, production, or logistics strategies in response to disruptions. This involves the capacity to shift suppliers, modify production lines, or use alternative routes to ensure continued operations during events such as supplier breakdowns, labor shortages, or fluctuating demand.
- Agility, on the other hand, emphasizes the speed and efficiency with which a supply chain can implement these changes. Agile supply chains can quickly reroute shipments, alter production schedules, or adapt logistics networks in real-time, minimizing downtime and maintaining operational flow.
- Redundancy also plays a role, although it might appear to conflict with efficiency. Having backup suppliers, alternative shipping routes, or even excess inventory ensures that disruptions do not lead to complete shutdowns.
- Collaboration across the supply chain is equally important. Strong partnerships with suppliers, logistics providers, and other stakeholders facilitate smoother communication and coordinated responses during crises.
- Finally, sustainability contributes to resilience by reducing reliance on vulnerable resources and enhancing long-term stability, especially when facing climate-related disruptions. Integrating these elements into a company’s operations not only strengthens resilience but also builds a competitive advantage in today’s volatile global market.
How Software supports resilience
Software is a powerful enabler of resilience in modern supply chains, addressing key attributes such as transparency, flexibility, agility, and collaboration.
- One of the most impactful tools is data gathering and analytics, which enhances transparency. By providing real-time visibility into the movement of goods, inventories, and potential disruptions, software allows businesses to anticipate bottlenecks and make informed decisions before issues escalate. This level of transparency is critical for proactive risk management and ensures smoother operations across complex global supply chains.
- Artificial intelligence (AI) further strengthens resilience by enabling advanced forecasting and scenario planning. AI-driven platforms can predict disruptions, such as severe weather events or supplier shortages, and model various outcomes, helping businesses plan for contingencies. This capability directly supports agility, allowing companies to respond quickly to emerging challenges and adapt their supply chain strategies in real-time.
- Optimization software plays a critical role in maintaining flexibility while balancing efficiency. By analyzing various supplier networks, logistics routes, and production lines, optimization tools help companies identify the most resilient yet cost-effective strategies. This ensures that businesses can adapt to disruptions—whether through alternative suppliers, rerouted shipments, or adjusted production schedules—without significantly increasing costs or complexity.
- Another key element is software-driven scenario planning. These tools allow companies to simulate different disruption scenarios, such as natural disasters or geopolitical shifts, and develop multiple response plans. By doing so, businesses become more agile, ready to implement the best solution based on real-time conditions, minimizing downtime and operational losses.
- Collaboration tools, often cloud-based, enhance collaboration by connecting all stakeholders within the supply chain, from suppliers and manufacturers to logistics providers. These tools improve communication, allowing for quick and coordinated responses to crises. This interconnectedness strengthens the entire supply chain, ensuring more resilient and unified actions during disruptions.
Additionally, software also boosts sustainability by optimizing resource use, minimizing waste, and reducing emissions. Tools that optimize routes and track energy consumption help companies reduce their environmental footprint while simultaneously building long-term resilience. Sustainable operations are crucial in mitigating the risks posed by climate change and ensuring that supply chains remain robust over time.
Looking forward, advancements in AI, machine learning, and blockchain will further enhance these capabilities, allowing businesses to anticipate risks with even greater accuracy, optimize their operations more effectively, and ensure a sustainable approach to resilience. Companies that use these technologies for resilient supply chain planning are not only protecting their supply chains but are positioning themselves for long-term success in an unpredictable and changing climate landscape.
References
- Jan Henrich, Jason Li, Carolina Mazuera and Fernando Perez (2022), Future-proofing the supply chain, McKinsey:
https://www.mckinsey.com/capabilities/operations/our-insights/future-proofing-the-supply-chain#/ - Chandan Banerjee, Lucia Bevere, Hendre Garbers, Balz Grollimund, Roman Lechner, Andreas Weigel (2024), sigma 01/2024: Natural catastrophes in 2023 – Gearing up for today’s and tomorrow’s weather risks, Swiss Re Institute:
https://www.swissre.com/institute/research/sigma-research/sigma-2024-01.html#:~:text=Chapter%20Navigation&text=In%202023%2C%20natural%20catastrophes%20resulted,average%20of%20USD%2089%20billion - Tord Kjellstrom, Matthias Otto, Bruno Lemke, Olivia Hyatt, Dave Briggs, Chris Freyberg, Lauren Lines (2016), Climate Change and Labour: Impacts of Heat in the Workplace, United Nations Development Programme:
https://www.undp.org/sites/g/files/zskgke326/files/publications/Climate%20and%20Labour%20Issue%20Paper_28%20April%202016_v1_lowres.pdf - Claire Souch, Josh Turner (2023),The Heat is On: Assessing Climate-Related Supply Chain Disruption for Critical Industries, Moody’s:
https://climate.moodys.com/climate-blog/the-heat-is-on-assessing-climate-related-supply-chain-disruption-for-critical-industries - Marsh, GuyCarpenter, Mercer, OliverWyman, Climate resilience: Five steps to strenthen supply chains (2023), Marsh & McLennan Companies Ltd, Inc.
https://www.marshmclennan.com/assets/insights/publications/2023/august/2023-climate-resilience-five%20steps%20to%20strengthen%20supply%20chains.pdf
