Date post: | 13-Oct-2015 |
Category: |
Documents |
Upload: | dennis-bours |
View: | 54 times |
Download: | 0 times |
of 249
THE ROBERT GORDON UNIVERSITYABERDEEN BUSINESS SCHOOL
Climate proofing supply chains
Identification of climate risk indicators
to improve the supply chain risk management process (SCRMP)
Dennis Peter Bours
The Robert Gordon University, Aberdeen, UK
Aberdeen Business School
MSc International Purchasing and Supply Chain Management
Submission Date: 27 April 2014.
End result: MSc w honors
THE ROBERT GORDON UNIVERSITYABERDEEN BUSINESS SCHOOL
Climate proofing supply chains
Identification of climate risk indicators
to improve the supply chain risk management process (SCRMP)
Dennis Peter Bours
The Robert Gordon University, Aberdeen, UK
Aberdeen Business School
MSc International Purchasing and Supply Chain Management
Submission Date: 27 April 2014.
End result: MSc w honors
THE ROBERT GORDON UNIVERSITYABERDEEN BUSINESS SCHOOL
Climate proofing supply chains
Identification of climate risk indicators
to improve the supply chain risk management process (SCRMP)
Dennis Peter Bours
The Robert Gordon University, Aberdeen, UK
Aberdeen Business School
MSc International Purchasing and Supply Chain Management
Submission Date: 27 April 2014.
End result: MSc w honors
Page ii
Abstract
Purpose:
What makes complex supply chains leaner and more responsive in a stable
environment also increases their vulnerability to low-probability/high-impact
risk events, like climate risk events. High levels of uncertainty of impact and
occurrence of climate risk events make it hard for managers to guide their
organization to take appropriate action.
The main research objective is to study climate risks and related indicators
as part of the Supply Chain Risk Management Process (SCRMP), to facilitate
the development of risk management plans to improve supply chain
resilience towards physical climate change and weather risk sources, to be
called climate proofing. This research intends to complement existing
research on supply chain risk management (SCRM) indicators and risk
assessment, specifically focusing on climate risk events.
Methodology:
A mixed-method research approach was used, applying quantitative and
qualitative approaches to develop different perspectives, triangulate
research findings and reduce the risk of method bias. An iterative research
design was developed in which stages of data collection - by means of a
stepped literature review, interviews and an internet-mediated
questionnaire - and reflection by a specially established research expert
panel are successively utilized to inform, verify and refine subsequent
research stages.
Findings:
71% of respondents (strongly) agrees that supply chains have been more
than marginally impacted by climate risk events over the past three years;
though risk appetite is high and only 23.4% rates the impact of previous
events on their supply chain as 'unacceptable'.
Those impacted in the past rate the likelihood of future impacts higher, and
probably more realistic, and put more emphasis on contingency planning
and pre-incident preparation. Past impacts do not make people feel less
empowered in relation to their organization's risk management.
Page iii
Climate risk likelihood indicators need to be place-based and contextual.
Climate risk impact indicators should be a mix of cost, time and social
indicators. The appropriateness of specific indicators and focus on particular
climate risks depend very much on the individual company, the sector in
which it operates, the operational environment and the geographic and
climatic contexts in which its supply chains function.
Keywords:
Supply chain risk management
Climate risk events
Climate risk indicators
Risk assessment
Supply chain resilience
Climate proofing
Page iv
Acknowledgements
I don't think we're yet evolved to the point where we're clever enough to
handle a complex a situation as climate change. We're very active animals.
We like to think: Ah yes, this will be a good policy, but it's almost never
that simple. The inertia of humans is so huge that you can't really do
anything meaningful.
James Lovelock, scientist, environmentalist and futurologist, 2010.1
I would like to thank my RGU research supervisor Ms. Carol Air, the expert
panel members, Mr. Colin Airdrie, Prof. Gyngyi Kovcs, Mr. Ira Feldman,
Dr. J. Kevin Watson, Ms. Joyce Coffee, Dr. Laura Birou, Mr. Michael Keizer,
Ms. Nancy Gillis, Mr. Peter Jones, Mr. Peter Murray, Dr. Sander de Leeuw,
Prof. Steve Leon, Dr. Steven Dunn and Mr. Taylor Wilkerson, and special
data analysis reviewer Mr. Joris Vandelanotte for their time, guidance,
critical feedback and patience.
A special word of thanks to my wonderful wife, Martine, for coping with this
academic endeavour next to our already packed work schedules and lives.
1 Hickman 2010.
Page v
Table of Contents
Abstract ............................................................................................. ii
Acknowledgements ............................................................................. iv
Table of Contents ................................................................................ v
List of Figures ................................................................................... vii
List of Tables ..................................................................................... ix
List of Appendices............................................................................... ix
List of Abbreviations ............................................................................ x
INTRODUCTION...................................................................................1
I.1 Background to the Research..........................................................1
I.2 Overview of the Research Problem.................................................6
I.3 Research Questions......................................................................7
I.4 Objectives of the Study ................................................................8
I.5 Research Rationale ......................................................................8
I.6 Limitations ..................................................................................9
I.7 Outline of the Report.................................................................. 10
GLOSSARY........................................................................................ 11
G.1 Climate Change Technical Terms and Definitions........................... 11
G.2 Risk Management Technical Terms and Definitions ........................ 13
CHAPTER 1 LITERATURE REVIEW...................................................... 17
1.1 Introduction ............................................................................. 17
1.2 Risk Management...................................................................... 17
1.3 Supply Chain Risk Management .................................................. 20
1.4 Supply Chain Risk Management Process ....................................... 29
1.5 Supply Chain Risk Assessment .................................................... 29
1.6 Climate risks and their consequences........................................... 31
1.7 Climate risk indicators ............................................................... 37
Page vi
1.8 SCRM and Management Decision-Making...................................... 41
1.9 A critical note on (risk) perception............................................... 46
CHAPTER 2 RESEARCH METHODOLOGY ............................................. 48
2.1 Introduction ............................................................................. 48
2.2 Literature Reviews..................................................................... 56
2.3 Expert Panel Interviews ............................................................. 59
2.4 Internet-Mediated Questionnaire ................................................. 63
2.5 Expert Panel Reviewing.............................................................. 68
2.6 Data Analysis............................................................................ 69
2.7 Generalizability of Findings ......................................................... 70
CHAPTER 3 DATA FINDINGS............................................................. 71
3.1 Introduction ............................................................................. 71
3.2 Expert panel interviews.............................................................. 72
3.3 Internet-mediated questionnaire ................................................. 84
3.4 Summarizing the results per research objective .......................... 109
CHAPTER 4 DISCUSSION AND REFLECTION ..................................... 114
4.1 Introduction ........................................................................... 114
4.2 Critical analysis towards the research objectives ......................... 114
4.3 Critical analysis towards the research design .............................. 116
CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS ....................... 118
5.1 Conclusions towards the research objectives............................... 118
5.2 Impact of the study ................................................................. 121
5.3 Recommendations for future research........................................ 121
LITERATURE LIST ............................................................................ 123
FURTHER READING.......................................................................... 152
Page vii
List of Figures
Figure 1: The triple bottom line concept .................................................4
Figure 2: The ISO 31000 risk management process ............................... 20
Figure 3: Supply chain trends and climate risk ...................................... 22
Figure 4: Hazards, risks and consequences ........................................... 24
Figure 5: Example of a risk matrix with risk levels ................................. 25
Figure 6: Risk matrix, including type of action in case of a risk event ....... 25
Figure 7: Operational levels, risk origin and level of control .................... 28
Figure 8: A comprehensive supply chain risk management process
model .............................................................................. 30
Figure 9: Supply chain risk assessment flowchart .................................. 31
Figure 10: Major global risk events 1970-2012...................................... 32
Figure 11: Average total economic losses (USD) per natural
catastrophe .................................................................... 33
Figure 12: Risk sources of global supply chain disruptions ...................... 34
Figure 13: Risk matrix, including climate risk events .............................. 35
Figure 14: Risk treatment options........................................................ 45
Figure 15: Luyt's 'Measurement development, validation, revision
framework' ....................................................................... 50
Figure 16: Simplified version of Newman, Lim and Pinedas Mixed
methods research interactive continuum.............................. 51
Figure 17: The iterative mixed-method research design ........................ 52
Figure 18: Stepped literature review approach ...................................... 57
Figure 19: Link between researcher and respondents............................. 64
Figure 20: Questionnaire design process .............................................. 65
Figure 21: Interview Q1: Supply chains impacted .................................. 72
Figure 22: Objective use of risk matrices .............................................. 77
Figure 23: Specific, existing or no risk category..................................... 81
Figure 24: Questionnaire respondents' gender ...................................... 84
Figure 25: Questionnaire respondents' field of work ............................... 85
Figure 26: Sector in which the respondents' organization operates .......... 86
Figure 27: Specific sector on which the respondents organization
focuses ............................................................................ 86
Figure 28: Size of the respondents' organization ................................... 87
Page viii
Figure 29: Respondents' years of experience in the sector of
employtment .................................................................... 88
Figure 30: Respondents' years of experience in their field of work ........... 88
Figure 31: Respondents' level of responsibility ...................................... 89
Figure 32: Respondents' region of employment ..................................... 90
Figure 33: Respondents' region of origin............................................... 91
Figure 34: Location of respondents' organization's head office................. 91
Figure 35: Likert scale on supply chains in general having been more
than marginally impacted by climate risk events over the
past 3 years ..................................................................... 94
Figure 36: Has your organization's supply chain been more than
marginally impacted by a climate risk event over the past 3
years?.............................................................................. 94
Figure 37: Climate risk events that more than marginally impacted
supply chains .................................................................... 95
Figure 38: Perceived impact of the climate risk event............................. 96
Figure 39: Impact of the climate risk event related to the company's
risk appetite ..................................................................... 97
Figure 40: Preferred climate risk impact indicators................................. 98
Figure 41: Perceived likelihood of future climate risk events impacting
respondents' supply chains over the coming three years ...... 100
Figure 42: Preferred climate risk prediction indicators .......................... 102
Figure 43: Perceived impact of the top 3 climate risk events ................. 103
Figure 44: Impact of climate risk events related to the company's risk
appetite ......................................................................... 104
Figure 45: Differences in flooding likelihood perception ........................ 105
Figure 46: Differences in hurricane / cyclone / typhoon likelihood
perception ...................................................................... 105
Figure 47: Types of risk treatment options used .................................. 106
Figure 48: Types of risk treatment options used when flood impacted .... 107
Figure 49: Types of risk treatment options used when hit by a
hurricane........................................................................ 107
Figure 50: Perceived level of influence on risk management decision-
making .......................................................................... 108
Figure 51: Western Digital factory inundated by flood waters ................ 159
Page ix
List of Tables
Table 1: Basic steps of the risk management process.............................19
Table 2: Operational levels, risk sources events and consequences ..........27
Table 3: SMART indicator properties ....................................................39
Table 4: Knowledge levels and risk consequence certainty ......................43
Table 5: Tomlin vs. Weinhofer and Bush on supply chain risk response
strategies .........................................................................44
Table 6: Main research paradigms .......................................................49
Table 7: Relationship between research objectives and questions ............71
Table 8: Indicators for climate risk consequences ..................................77
Table 9: Climate risk indicators ...........................................................80
Table 10: Application of a risk management system...............................92
Table 11: Adherence to a risk management standard.............................92
Table 12: Application of a supply chain risk management system ............93
List of Appendices
ANNEX 1: Members of the research expert panel ................................. 157
ANNEX 2: The July-November 2011 Thailand floods and disruptions in the
global hard disk supply chain......................................................... 159
ANNEX 3: Interview introduction and consent ..................................... 161
ANNEX 4: Interview protocol............................................................. 162
ANNEX 5: Interview transcripts ......................................................... 164
ANNEX 6: Internet-mediated questionnaire introduction ....................... 226
ANNEX 7: Interview-mediated questionnaire....................................... 228
Page x
List of Abbreviations
3BL Triple bottom line
4T Tolerate, treat, transfer and terminate
ACRM Adaptive collaborative risk management
ADB Asian Development Bank
ALARP As low as reasonably practicable
ANAO Australian National Audit Office
APEA Asia Pacific Evaluation Association
B2B Business to business
CDS Center for Decision Sciences
CEO Chief executive officer
CO2 Carbon Dioxide
COSO Committee of Sponsoring Organizations of the Treadway
Commission
CSCMP Council of Supply Chain Management Professionals
CSIRO Commonwealth Scientific and Industrial Research
Organisation
CSR Corporate social responsibility
DSE Department of Sustainability and Environment
EC European Commission
EPPI Evidence for Policy and Practice Information and Co-
ordinating Centre
ERM Enterprise risk management
GAMAB Globalement au moins aussi bon
GHG Greenhouse gases
GIZ Deutsche Gesellschaft fr Technische Zusammenarbeit
HSE Health and Safety Executive
IDEAS International Development Evaluation Association
IEEE Institute of Electrical and Electronics Engineers
Page xi
IEEM Industrial Engineering and Engineering Management
IOCE Organization for Cooperation in Evaluation
IOR Institute of Operational Risks
IPCC Intergovernmental Panel on Climate Change
IRM Institute of Risk Management
ISIC International Standard Industrial Classification codes
ISO International Standards Organization
IUCN International Union for Conservation of Nature
JIT Just-in-time
KCI Key control indicator
KPI Key (risk) performance indicator
KRI Key risk indicator
LBA Logistics Bureau Asia
LLA Logistics Learning Alliance Ltd
MECE Mutually exclusive and collectively exhaustive
MEM Minimum endogenous mortality
MIT Massachusetts Institute of Technology
NASA National Aeronautics and Space Administration
ND-GAIN Notre Dame University Global Adaptation Index
NFPA National Fire Protection Association
ODI Overseas Development Institute
OECD Organisation for Economic Co-operation and Development
PWC Pricewaterhouse Coopers
QDA Qualitative data analysis
R&D Research and development
RO Research objective
SCC Supply Chain Council
SCOR Supply Chain Operations Reference model
SCRLC Supply Chain Risk Leadership Council
Page xii
SCRM Supply chain risk management
SCRMP Supply chain risk management process
SMART Specific, measurable, attainable and action-oriented,
relevant, and time-bound
SME Small and medium-sized enterprises
TQM Total quality management
UNCED United Nations Conference on Environment and
Development
UNDESA United Nations Department of Economic and Social Affairs
UNEP United Nations Environment Programme
UNFCCC United Nations Framework Convention on Climate Change
UNGA United Nations General Assembly
UNWCED United Nations World Commission on Environment and
Development
UPS United Parcel Service
USD United States Dollar
WEF World Economic Forum
WMO World Meteorological Organization
Page 1
INTRODUCTION
Part of what you need to do in the supply chain is to help your company
anticipate events, and understand the environment you operate in around
the globe.
Frances Townsend, speaker at CSCMP 2008.2 3
I.1 Background to the ResearchThe research background provides a historical perspective and discusses
important concepts on which this research is built, needed for the reader as
foundation in order to grasp the research aims and objectives and to
understand choices made in subsequent chapters.
Climate Change
It was late 19th century when Swedish scientist Svante Arrhenius first
calculated the effect of atmospheric CO2 on global warming and cooling.
Given the low rate of CO2 production in 1896, Arrhenius estimated that
global warming due to human CO2 emissions would take thousands of
years.4 Through the work of the Intergovernmental Panel on Climate
Change (IPCC)5 we now know better. The IPCC was established by the
United Nations Environment Programme (UNEP) and the World
Meteorological Organization (WMO) in 1988 to provide the world with a
clear scientific view on the current state of knowledge in climate change and
its potential environmental and socio-economic impacts.6 The work of the
IPCC has driven the development of an extensive research base on the
concepts of climate change adaptation, adaptive capacity, resilience and
vulnerability to climate change in the context of human communities and
systems.7
2 CSCMP is the Council of Supply Chain Management Professionals annual global conference.3 Frances M. Fragos Townsend is the former Homeland Security Advisor to United States President
George W. Bush and member of the New York policy study group Council on Foreign Relations.4 Weart 2008.5 IPCC 1990a, 1990b, 1995a, 1995b, 2001a, 2001b, 2007a, 2007b, 2012, 2013 and 2014.6 UNGA 1988.7 Kelly and Adger 2000; OBrien et al. 2004; Smit and Wandel 2006; Hahn and Frode 2010;
Vijayavenkataraman, Iniyan and Goic 2012.
Page 2
It has provided the scientific foundation for negotiating the United Nations
Framework Convention on Climate Change (UNFCCC)8, which has the
ultimate objective to stabilize greenhouse gas concentrations at a level
that would prevent dangerous anthropogenic (human induced) interference
with the climate system. 9
The work of the IPCC has also inspired research that focuses on climate
change, adaptation, resilience and vulnerability towards and within specific
economic / industrial sectors, technologies or cross-sectoral areas of human
systems, for example energy10, transport and infrastructure11, urban
environments12 or banking and the insurance industry13.
Climate Change, Sustainability and the Corporate Agenda
Climate change is in essence a sustainable development issue, given that
unsustainable resource use beyond the carrying capacity of supporting
ecosystems has contributed to the current state of affairs14, which
constraints development and demands future growth and development to
be more sustainable.
It was 1970 when Milton Friedman published his (in)famous article titled
The social responsibility of business is to increase its profits15 in New York
Times Magazine. It was written at a time of strong critique on socialist
economic models and based on the idea that social/environmental
responsibility comes at the expense of economic returns. The sustainability
doctrine changed with the 1973 and 1979 energy crises and the United
Nations World Commission on Environment and Development (UNWCED)
report Our common future16, introducing the concept of sustainable
development.
8 The UNFCCC is an international environmental treaty negotiated at the United Nations Conference onEnvironment and Development (UNCED), informally known as the Earth Summit, held in Rio deJaneiro from 3 to 14 June 1992.
9 UN 1992, Article 2, p. 4.10 Connor, Michaeklow and Willianson 2009.11 Dasgupta et al 2009; Love, Soares and Pempel 2010.12 Hunt and Watkiss 2011.13 Lubber 2012; Seifert and Lindberg 2012.14 See footnote 5.15 Friedman 1970.16 UNWCED 1987.
Page 3
Nevertheless, sustainability and social responsibility were still seen as part
of corporate philanthropy / corporate social responsibility (CSR) with little to
no relevance to core corporate strategies. Only over the past decade, aided
by reports like the Stern review report on the economics of climate
change17, companies have started to recognize that their growth is limited
by and depends on actions in relation to the challenges posed by carbon
constraints, limits to environmental degradation and other issues on the
climate change and sustainability agenda.
This agenda of sustainability and corporate responsibility is not only central
to business strategy but will increasingly become a critical driver of business
growth ... I believe that how well and how quickly businesses respond to
this agenda will determine which companies succeed and which will fail.
Patrick Cescau, CEO of Unilever in PWC 2011, p. 1.
Over 50% of businesses now have a sustainability strategy in place and
57% of top executives believe that the overall benefits of efforts to achieve
sustainability outweigh the costs.18 Carter and Rogers state that
organizational sustainability consists of three components: the natural
environment, society, and economic performance corresponding with the
triple bottom line (3BL) concept of Elkington19, visualized on the following
page in Figure 1.
These three components suggest that sustainable organizational activities
do not only have a positive effect on the environment and society, but can
also result in economic benefits and competitive advantages for
organizations. A diverse body of academic publications20 shows that from
mid-2000 onwards sustainability has steadily moved to the heart of the
corporate strategy. While corporate sustainability at times focuses more on
business continuity planning or future proofing than on the 3BL concept,
corporations do start to realize that it is critical to maintaining an
organizations social license to operate.21 Sustainability thinking, both from
17 Stern 2006.18 Lowitt 2009; Halldrsson and Kovcs 2010; KPMG International 2011; PWC 2011.19 Elkington 1997 and 2004; Carter and Rogers 2008.20 Markley and Davis 2007; Smith 2007; Moore and Wen 2008; Feldman 2009; McDermott 2009;
Ramirez and Hachiya 2009; Vaccaro 2009; Nejati, Shahbudin and Amran 2010; Ciu and Jiao 2011;Henderson 2011; Bouglet, Joffre and Simon 2012; Murthy 2012;
21 Pojasek and Hollist 2011, p. 83.
Page 4
a 3BL as well as the business continuity sustainability perspective, gained
momentum with the coming into force of the Kyoto Protocol in 2005, an
international agreement to limit green house gas (GHG) emissions adopted
in 1997.22
Figure 1: The triple bottom line concept23
Thenceforth there has been a growing focus of the corporate sustainability
agenda towards the sustainability of business processes and industrial
operations in relation to GHG emissions and the reduction of their carbon
footprint. Technological innovations, emission trading schemes and other
Kyoto mechanisms help companies to achieve their emission limits and
shrink their carbon footprint, but industrys responses depend heavily on
pressures coming from all three 3BL elements, e.g. regulatory pressures,
societal and shareholder demands, market positioning, economic conditions
and access to alternative technologies.24
In a 2012 research by MIT Sloan Management Review in collaboration with
the Boston Consulting Group25 67% of respondents agrees that
sustainability-related strategies are needed to be competitive and 31% sees
sustainability activities and decisions directly adding to the overall profits.
22 UNFCCC 1998.23 Carter and Rogers 2008, p. 365, fig. 1.24 van der Woerd et al. 2004; Jeswani, Wehrmeyer and Mulugetta 2008; Weinhofer and Hoffman 2010;
Lee 2011.25 Haanaes et al. 2012.
Environmentalperformance
Socialperformance
Sustainability
Economicperformance
Page 5
Climate Change, Sustainability and Supply Chain Management
Organizations more and more look at the inter-relationship between their
supply chain and climate change or environmental factors26, given that 50
to 70% of a products value is derived from its supply chain.27
Initial reasons for taking into account environmental factors in supply chain
processes and management were societal pressures and to ensure market
access in the face of environmental regulations, e.g. emission limits and
other environmental policies.28 Lately, more economic factors have come
into play given stringent climate change regulations, increasing raw material
and fuel needs by developing economies and growing water scarcity, having
possibly significant impacts on future operating costs.29
Climate Proofing Supply Chains
Climate change can have regulatory, direct economic as well as physical
effects on supply chains, all resulting in potential costs, and there is
increased awareness of supply chains climate vulnerability in that respect.
Kolk and Pinkse30 look at organizational climate change supply chain
strategies in relation to GHG emissions and related risks, while Lash and
Wellington31 look at carbon-related risks and opportunities. Halldrsson and
Kovcs32 discuss the development of an energy agenda, opposed to a
sustainability agenda, with the need to rethink supply chain management
on both the operational as well as the conceptual level. These researchers
focus on greening the supply chain, which concentrates on sustainability
aspects and does not necessarily take into account vulnerability and
resilience towards physical climate change and environmental factors.
This research focuses on the physical element of climate change and
extreme weather events - not the legislative element or direct economic
effects but the economic impact of such occurrences should be seen as a
driver and factor in support of climate risk research.
26 Halldrsson and Kovcs, 2010; Jira and Toffel 2012.27 Mahler 2007; Lowitt 2009.28 Sadgrove 1996; Lippmann 1999; Hall 2000.29 Jones and Levy 2007; Lash and Wellington 2007; McKinsey 2007; Jun et al. 2010; Bapna 2012; Jira
and Toffel 2012.30 Kolk and Pinske 2004.31 Lash and Wellington 2007.32 Halldrsson and Kovcs 2010.
Page 6
Though cross-border collaboration within supply chains is not new33 it has
intensified through outsourcing and off-shoring over the past decades
resulting in longer, more complex supply chains.34 Process improvement
strategies like just-in-time (JIT) management, total quality management
(TQM), six sigma and lean were introduced and aimed at reducing waste,
while improving responsiveness.
Many manufacturing executives now recognize that quality problems,
longer supply chains, lack of visibility are also part of the offshoring
operation.35 And what makes complex supply chains leaner and more
responsive in a stable environment also increases their vulnerability to low-
probability/high-impact risk events.36 Large-scale disruptions illustrate
companies dependencies on a web of infrastructure connections. Phone
lines, power lines, water lines, gas lines, rail lines, highways and ports
connect companies to critical services, suppliers and customers,37 n.b.
links, nodes as well as assets in these will be impacted by such risk events.
I.2 Overview of the Research ProblemWhat makes complex supply chains leaner and more responsive in a stable
environment also increases their vulnerability to low-probability/high-impact
risk events.38 Despite an increased awareness of the impact climate change
and environmental factors can have on business activities and a growing
interest in the role supply chain management can play there has been
limited research that addresses supply chain resilience towards physical
climate change and weather-related risk sources (hereafter called climate
risk sources) and events (hereafter called climate risk events), from a
supply chain risk management and risk assessment perspective.39
33 Leonard Reid wrote a famous 1958 essay in which a pencil describes all its antecedents in detail;Actually, millions of human beings have had a hand in my creation, no one of whom even knowsmore than a very few of the others.. Reid 1958.
34 As one example of this growing level of interconnectivity and complexity: Rivoli 2006.35 Ferreira and Prokopets 2009.36 Cranfield University 2003a; Gatignon and Kimberley 2004; Kleindorfer and van Wassenhove 2004;
Sheffi 2005a and 2005b; Zsidisin, Ragatx and Melnyk 2005; Wagner and Bode 2006; Craighead et al.2007; Bleda and Shackley 2008; Wagner and Bode 2008; Linnenluecke and Griffiths 2010; Winn etal. 2011; Jira and Toffel 2012; Meena, Sarmah and Sarkar 2011; Linnenluecke, Griffiths and Winn2012; Machowiak 2012; Weinhofer and Busch 2012.
37 Sheffi 2005b, p. 18.38 See footnote 36.39 Cranfield University 2003a; Christopher and Peck 2004; Rao and Goldsby 2009; Halldrson and
Kovcs 2010; Turner 2011; Winn et al. 2011; Linnenluecke, Griffiths and Winn 2012.
Page 7
The high levels of uncertainty of consequences or impact and occurrence of
climate change and extreme weather events make it hard for managers to
guide their organization to take appropriate action.40
The problem statement translates into the following management
questions:
1. To what extent have climate change and extreme weather events
impacted companies supply chains?
2. Are physical climate change and weather-related risk indicators
(hereafter called climate risk indicators) taken into account into
companies Supply Chain Risk Management Processes (SCRMP)?
3. Do these climate risk indicators aid management decision-making to
improve supply chain resilience?
I.3 Research QuestionsThe research questions below and objectives in the subsequent paragraph
flow naturally from the problem statement and related management
questions, taking into consideration existing good practice and guidelines41
on formulating research questions and objectives.
1. To what extent have physical climate change and extreme weather
events impacted supply chains?
2. To what extent are climate risk indicators taken into account in
companies Supply Chain Risk Management Processes (SCRMP)?
2 a. What are the climate risk indicators used in companies SCRMP?
2 b. What are the risk categories in which these indicators are used
in companies SCRMP?
2 c. What is the risk ranking given to these risk indicators used?
3. How do climate risk indicators, risk categories and risk ranking inform
management decision-making to improve supply chain resilience?
40 Peterson 2006; Winn et al. 2010; Linnenluecke, Griffiths and Winn 2012.41 Creswell 2012; Rojon and Saunders 2012; Saunders, Lewis and Thornhill 2012; Miles, Huberman and
Saldaa 2013.
Page 8
I.4 Objectives of the StudyThe main objective of this research is to study climate risk indicators as part
of the Supply Chain Risk Management Process (SCRMP), with a focus on the
risk assessment phase, to facilitate the development of risk response and
control plans to improve supply chain resilience towards climate risk events,
to be called climate proofing.42
The research objectives below give a more operational view of the research
questions, identifying elements to be answered to arrive at satisfactory
conclusions about the research questions.
RO1. To identify whether supply chains have been more than marginallyimpacted by physical climate change and extreme weather events
(climate risk events) over the past three years
RO2. To identify the perceived extent of negative consequences of climaterisk events on the supply chains impacted
RO3. To identify the climate risks, risk indicators and related riskcategories used in companies Supply Chain Risk Management
Processes (SCRMP)
RO4. To analyze climate risks by identifying their consequence severity,risk likelihood, levels of risk exposure and thus risk ranking
RO5. To make recommendations on implementing this information into theSCRMP, and
RO6. To describe how this can inform management decision-making toimprove supply chain resilience.
I.5 Research RationaleThis research aims to add to the body of knowledge on supply chain risk
assessment from a climate risk perspective and hopes to complement the
existing research on supply chain risk management (SCRM) indicators and
risk assessment. Researchers may find the findings useful in the
development of future SCRM frameworks. Information on indicators and risk
categories in which these indicators are used could support a more
streamlined integration of climate risk indicators in SCRMPs.
42 The term climate proofing seems to imply that businesses and processes can truly and completelybe made climate proof. This is not practically possible and as such the term is technically amisnomer. It would be more accurate to talk about enhancing / improving the climate resilience,but in laymans terms this is often replaced with the notion of climate proofing.
Page 9
Senior management in companies whose supply chains will likely be
impacted by future climate risk events can use the research outcomes to
inform their SCRM and related decision making towards supply chain
resilience.
This research stems from the authors professional experience in the climate
change and supply chain disciplines, and his professional interest in the
possible consequences created by the potential rise in extreme weather
events both in number and force - on supply chain operations.
I.6 LimitationsThe limited timeframe in which the research took place affected research
design choices.43 Due to the largely qualitative nature of expert panel
interview data44 and the snowballed self-selection approach chosen for
applying the internet-mediated questionnaire45 only moderatum
generalizations46 based on contextual transferability47 of results towards
real world contexts are possible, further explained in Paragraph 2.7.
To increase accuracy and to triangulate results an iterative mixed-method
research design, further explained in Chapter 2, was chosen to collect
qualitative and quantitative data concurrently in order to counter-balance
weaknesses of one kind of data by strengths of the other kind.48
Choices made towards this research studys boundaries are as follows:
- The exact reasons behind current climatic changes developing, possibly
being a mix of anthropogenic (man-made) and biotic or natural impacts,
will not be explored as part of this research study
- This research focuses on the physical element of climate change and
(extreme) weather events, not on the legislative elements, social
elements or direct economic effects
- Earthquakes and volcanoes, being natural catastrophes, are not taken
into account in this research study given the research base on the
linkages between climate change and the occurrence of earthquakes
and volcanoes is still in its infancy
43 See Chapter 2 Research Methodology.44 See Paragraph 2.3 Expert Panel Interviews.45 See Paragraph 2.4 Internet-Mediated Questionnaire.46 Schutz 1982; Williams 2002.47 Halldrsson and Aastrup 2003, p. 327; Saunders, Lewis and Thornhill 2012, p. 194.48 Nslund 2002; Mangan, Lalwani and Gardner 2004; Kovcs and Spens 2005; Harrison and Reiley
2011; Sanders and Wagner 2011; Golicic and Davis 2012.
Page 10
- The focus of this research study is on the negative impacts of climate
risk events not on potential positive consequences
- The negative consequences of climate risk sources and events on supply
chains lay at the heart of this research, not their impact on the broader
concept of value chain, which would include product design, marketing,
after-sales, re-use, etc.
- The aim of this research study is not to develop climate risk indicators,
but to identify climate risk indicators and related risk categories being
used in companies Supply Chain Risk Management Process (SCRMP).
- This research departs from and builds upon risk management standard
31000 of the International Organization for Standardization (ISO),49
being the most widely used and accepted risk management standard
- Given the researchs focus on climate risk sources and taking into
account the limited research timeframe, the focus will be on the risk
assessment phase.
Do note that the Harvard referencing system has been used to reference all
literature throughout this research report, but to improve overall readability
the referencing has been done in the footnotes and not the main text.
I.7 Outline of the ReportThis research report is divided into an introduction, glossary and five
chapters. The Introduction provides the background and foundation for the
reader, and sets the research objectives. Technical terms used are defined
in the Glossary, which is placed after the Introduction because terms
defined are being used throughout the report and form the definitional
groundwork of subsequent chapters.
The first chapter provides an in-depth review of relevant supply chain risk
management literature. Chapter 2 explains the choices made towards the
research design and the methodology adopted. Data analysis and results
can be found in Chapter 3, while a reflection on these results is presented in
Chapter 4. Conclusions and recommendations are provided in the final
chapter, Chapter 5, looking back at the problem statement and objectives
formulated in this introduction.
49 ISO 2009a and 2009b.
Page 11
GLOSSARY
With the research aim focusing on climate risk sources in supply chain risk
management, this research brings together two fields of knowledge with
each their specific technical terms and definitions. Given the importance and
relevance of the explanations of concepts as forming the definitional
groundwork for this research study and their use throughout the following
chapters of this research report, the choice was made to introduce these
concepts here.
Climate change related technical terms and definitions are presented in the
first paragraph, with Paragraph G.2 focusing on terms and definitions
specific to risk management.
G.1 Climate Change Technical Terms and DefinitionsThe definitions have been adapted from the sources representing the most
widely used definitions, being the IPCC Fourth Assessment Report50 and the
Dictionary of Geological Terms51, unless stated otherwise in a footnote.
Adaptation Adjustment in natural or human systems in response to
actual or expected climatic stimuli or their effects, which moderates harm,
increases resilience or exploits beneficial opportunities.
Adaptive capacity The ability of a system to adjust to climate change
(including climate variability and extremes) to moderate potential damages,
to take advantage of opportunities, or to cope with the consequences.
Climate change Climate change refers to a change in the state of the -
climate that can be identified by changes in the mean and/or the variability
of its properties, and that persists for an extended period, typically decades
or longer. Climate change may be due to natural internal processes or
external forcings, or to persistent human-induced changes in the
composition of the atmosphere or in land use.
50 IPCC 2007a and 2007b.51 Bates and Jackson eds. 1984.
Page 12
Climate proofing In this research study climate proofing is defined as
improving or enhancing supply chain resilience towards climate risk events,
which are those risk events originating from physical climate change and
weather-related risk sources, to be called climate risk sources.52
Environment Environment is used and defined in this research as the
natural environment, encompassing all living and non-living things occurring
naturally on Earth or some region thereof, and their interaction.53 The
concept of environment will be used interchangeably with the concept of
ecosystem.
Impacts The effects of climate change on natural and human systems.
Depending on the consideration of adaptation, one can distinguish between
potential impacts and residual impacts; Potential impacts, being all impacts
that may occur given a projected change in climate, without considering
adaptation. Residual impacts, being the impacts of climate change that
would occur after adaptation.
Mitigation A human intervention through technological change and
substitution that reduces resource inputs and emissions per unit of output.
Although several social, economic and technological policies would produce
an emission reduction, with respect to climate change, mitigation means
implementing policies to reduce GHG emissions and enhance GHG sinks.
Potential In the context of climate change, potential is the amount of
mitigation or adaptation that could be - but is not yet - realized over time.
Resilience The ability of a system to absorb disturbances while retaining
the same basic structure and ways of functioning, the capacity for self-
organization, and the capacity to adapt to stress and change.
Sensitivity Sensitivity is the degree to which a system is affected, either
adversely or beneficially, by climate variability or change. The effect may be
direct (e.g., a change in crop yield in response to a change in the mean,
range or variability of temperature) or indirect (e.g., damages caused by an
increase in the frequency of coastal flooding due to sea-level rise).
52 Defined by the author.53 Johnson et al. 1997.
Page 13
Sustainability Sustainability is improving the quality of human life while
living within the carrying capacity of supporting ecosystems.54
Sustainable development Development that meets the cultural, social,
political and economic needs of the present generation without
compromising the ability of future generations to meet their own needs.
Vulnerability Vulnerability is the degree to which a system is susceptible
to, and unable to cope with, adverse consequences of climate change,
including climate variability and extremes. Vulnerability is a function of the
character, magnitude, and rate of climate change and variation to which a
system is exposed, its sensitivity, and its adaptive capacity.
G.2 Risk Management Technical Terms and DefinitionsRisk management technical terms and definitions follow the ISO 31000 Risk
Management Principles and Guidelines and ISO Guide 73 Risk Management
Vocabulary55, unless stated differently in the footnote.
The literature review in the subsequent chapter further elaborates on risk
management, supply chain risk management, and the risk assessment
process adopted for use in this research study.
Exposure Exposure is the extent to which an organization is subject to a
risk event.
Risk Risk is the effect of uncertainty on (business) objectives. The effect
may be positive, negative or a deviation from the expected and risk is often
described by an event, a change in circumstances or a consequence. Given
the managerial scope of this research the focus will be on negative effects
of uncertainty on objectives, most accurately reflecting business reality.
Risk acceptance levels Risk acceptance levels are the level of risk to
which one makes an informed decision to take a particular risk. Risk
acceptance can occur without risk treatment. The ISO31000 standard states
that generally established risk acceptance principles should be used. The
ALARP (as low as reasonably practicable) principle will be used to link risk
54 Barrow 1994.55 See footnote 49.
Page 14
acceptance levels to decision making, in a three level context where low
risks are called accepted and high risks are intolerable and have to be
reduced, with in between these zones a region of tolerability.56 The resulting
acceptance levels are acceptable, tolerable and unacceptable.
Risk analysis Risk analysis is the process to comprehend the nature of
risk and to determine the level of risk. The main elements of risk analysis
are risk levels, risk likelihood and risk consequence.
Risk assessment Risk assessment is the overall process of risk
identification, risk analysis and risk evaluation.
Risk categories Risk categories are sometimes referred to as risk
dimensions57 or risk elements58. Irrespective of the term used they
indicate the grouping of risks by characteristic supply chain or
organizational elements, for example; demand risks, process risks,
transportation risks, etc. There are various ways of categorizing risks.59 The
aim will be to identity in which categories climate risk indicators are used,
without judging the categorization itself. Research Objective 3 (RO3)
focuses in part on determining the risk categories in which climate risk
indicators are used in companies SCRMP.
Risk consequence Risk consequence is the result of a risk source giving
rise to risk, or the outcome of an event affecting objectives. A consequence
can be certain or uncertain and can have positive or negative effects on
objectives with possible knock-on effects, either expressed qualitatively or
quantitatively. Risk consequence is often measured on a scale from
negligible or insignificant to catastrophic or critical.60 Risk consequence
is part of Research Objective 4 (RO4).
Risk evaluation Risk evaluation is the process of comparing the results
of risk analysis with risk criteria to determine whether the risk and/or its
magnitude are acceptable or tolerable. It involves the sub-steps of risk
ranking and risk acceptance.
56 Ersdal and Aven 2008, p. 200; Aven 2009; Tummala and Schoenherr 2011, p. 479.57 Spekman and Davies 2004.58 Tang and Numaya 2011.59 Finch 2004; Spekman and Davies 2004; Zsidisin 2004; Kleindorfer and Saad 2005; Peck 2005; Sheffi
and Rice 2005; Oke and Gopalakrishnan 2009; Tummala and Schoenherr 2011; Sodhi, Son and Tang2012.
60 ISO 2009a and 2009b; Tummala and Schoenherr 2011.
Page 15
Risk event Risk event is an occurrence or change of a particular set of
circumstances having the potential to give rise to risk, for example the
transformation of a hazard into a risk source giving ultimately rise to risk.
Climate risk events are those risk events originating from physical climate
change and weather-related risk sources, to be called climate risk sources.
Risk identification Risk identification is the process of finding,
recognizing and describing risks. It involves the identification of climate risk
sources and events. Research Objective 1 (RO1) focuses on finding,
recognizing and describing risks, while Research Objective 3 (RO3) targets
the identification of climate risk indicators used in companies SCRMP.
Risk indicators Risk indicators are metrics used to monitor identified risk
exposures over time, therefore any piece of data that can perform this
function may be considered a risk indicator.61 Indicators may represent key
ratios tracked as indicators of evolving risks, or they may be more elaborate
and involve the aggregation of several individual risk indicators into a multi-
dimensional score about emerging events that may lead to new risks.62
Climate risk indicators are those risk indicators that link directly to physical
climate change and weather-related risk exposures.
Risk levels - The level of risk is the magnitude of a risk or a combination ofrisks, expressed in terms of the product of the likelihood of occurrence of a
certain future risk event and the likely consequences or impact of the event,
or risk consequence, on the supply chain, informed by the companys risk
acceptance level. The risk levels are often visually presented in a risk
matrix, ranking and displaying risks by defining ranges for consequence and
likelihood. Risk levels are part of Research Objective 4 (RO4).
Risk likelihood - Risk likelihood is the chance of something happening /
occurring, often measured on a scale from extremely rare to often63 or
from no chance to certain to happen.64 The term likelihood has been used,
opposed to probability, to not give the notion of a narrower mathematical
interpretation of likelihood.65 The IPCC reports66 range of the likelihood of
61 IOR 2010.62 Beasley, Branson and Hancock 2010.63 Tummala and Schoenherr 2011.64 Weinstein and Diefenbach 1997.65 Klemens 2009.66 See footnote 50.
Page 16
occurrence of an uncertain risk event is used throughout this report, being:
>99% Virtually certain; >90% Very likely; >66% Likely; 33 to 66% About
as likely as not;
Page 17
CHAPTER 1 LITERATURE REVIEW
A stepped literature review approach, further described in Paragraph 2.2,
was used to critically review the existing body of knowledge relevant to this
research and needed to frame and ground the research within the existing
supply chain climate risk management enigma. The review started with an
initial literature orientation and exploratory review focusing on the climate
change and environmental context in relation to corporate processes and
supply chains, shaping the background to the research and aiding in the
formulation of the research problem.
1.1 IntroductionThis chapter focuses on providing the needed theoretical foundation for this
research study using a focused and refined literature review process to
demonstrate the significance of the existing body of research, to inform and
advance research design stages and to show how this research adds and
contributes to the specific area of investigation and wider context.
The following paragraphs start with a short historical view on risk
management and how it has developed over time. It looks at the growing
importance of SCRM, how climate risks fit into this picture, the processes
used in SCRM analysis and finally, how this all should inform management
decision-making, ending with a critical note on risk perception.
1.2 Risk ManagementIt was Chevalier de Mr in 1717, professional knight and gambler, who
instigated the development of the first scientific approach to risk
management. He asked famous mathematician Blaise Pascal to calculate his
unexpected losses in a game of rolling the dice. Pascal collaborated with
amateur mathematician Pierre de Fermat and the two laid out the
foundation for the theory of probability, hence the first steps were set in
risk management.67
67 Falk 1997.
Page 18
A seminal piece of work in the management discipline dealing directly with
risk management was by Markowitz68 who described risks and rewards of
financial investments. Early risk management and analysis research can be
divided into two distinct groupings. The first category focuses mainly on
statistical inference and categorization of technological risks and the risks of
human activities with a focus on risk perception and/or business processes,
and the use of mathematical and statistical procedures to analyze and
evaluate risks.69 The second body of research - with researchers like Robert
W. Kates and Gilbert F. White - focuses on natural hazards from an
environmental and natural resource management perspective, often using
processes and procedures originating from social research and social
evaluation practices.70
Bowonder makes a link between the two groups by focusing on
environmental risks and early warning systems in developing countries,
while Sherif looks at environmental considerations to strengthen
technological risk management.71 But a first attempt to link natural hazards,
risk management and (business) decision-making is perhaps by Robert W.
Kates research (1978) on risk assessment of environmental hazards.
Though he defines environmental hazard as the threat potential posed to
man or nature by events originating in or transmitted by the natural or built
environment (p. 12), which is a wider definition of the environment than
the one used for this research. His research case studies mainly explore
environmental hazards originating in the built environment, like
stratospheric pollution and ozone, mercury pollution in agriculture and risks
related to nuclear reactors. Though his conclusion can be seen as a
precursor of the present-day climate change discussion:
We need, in short, some global abominations some avoidances, some
risks to be averted not because it is impossible to cope successfully with
any of these potential [environmental] hazards, but because it may be
impossible to cope successfully with all of them
Robert W. Kates 1978 p. 100.
68 Markowitz 1952.69 Markowitz 1952; Starr 1969; Otway and Pahner 1976; Rowe 1980; Fischhoff et al. 1981; Covello
1983; Covello and Mumpower 1985; Slovic 1987; Greenwald and Stiglitz 1990; Sherif 1991.70 Burton and Kates 1964; White 1974; White and Haas 1975; Burton, Kates and White 1978; Kates
1978; Bowonder 1981; Baird 1986; Sherif 1990.71 Bowonder 1981; Sherif 1990.
Page 19
Risk management research in general72 shows a reluctance to come to one
all-encompassing definition of risks, possibly related to the diverse nature of
both risks and their consequences. Risk and all its elements have been
defined in the Glossary and - as earlier indicated - the focus will be on the
negative effects of uncertainty on business objectives, most accurately
reflecting todays business reality in the light of climate risks.
There are various ways to describe risk management and related
processes73, but it essentially boils down to four fundamental steps (Table
1).
1. Identify potential risk sources in their context
2. Asses risk levels of all potential threats identified
3. Evaluate findings against risk acceptance levels and wider context
4. Select and implement risk treatment options.
Table 1: Basic steps of the risk management process74
The risk management process most widely used and accepted is that of the
International Organization for Standardization (ISO) risk management
standard 31000,75 its basic representation visualized in Figure 2 on the
following page. This research will depart from and build upon this standard,
given it is the most widely used and accepted standard, informed by other
relevant academic research with a focus on the risk assessment phase.
The processes of risk assessment (risk identification, quantification, analysis
and evaluation) and management (the overall process, resulting risk
treatment, communication, monitoring and reviewing) have developed
considerably over time. We now know that differences in risk acceptance
have more to do with differences in risk perception related to gender,
72 Markowitz 1952; Starr 1969; Rowe 1980; Fischhoff et al. 1981; Covello and Mumpower 1985; Baird1986; Slovic 1987; Greenwald and Stiglitz 1990; Sherif 1990 and 1991; Fischhoff 1995; Kleindorferand Kunreuther 1999a and 1999b; Mitchell 1999; HSE 2001; Slovic and Weber 2002; Slovic andPeters 2006; Wagner and Bode 2006 and 2008; Aven 2009; ISO 2009a; Rao and Goldsby 2009;Beasley, Branson and Hancock 2010; IOR 2010; IRM 2010; Tang and Musa 2011.
73 McCormack et al. 2008; ISO 2009a and 2009b; Pujawan and Geraldin 2009; Kouvelis et al. 2012.74 As identified by the author, based on the resources in footnote 72.75 ISO 2009a and 2009b; IRM 2010; May and Plummer 2011; SCRLC 2011; Tummala and Schoenherr
2011; Jereb, Cvahte and Rosi 2012; Dallas 2013.
Page 20
culture, individual vs. group decision-making behaviour, level of knowledge
and media coverage of risks - rather than differences in attitude towards
(perceived) risks.76
Figure 2: The ISO 31000 risk management process77
1.3 Supply Chain Risk ManagementWith the term supply chain management only being coined on June 4 1982
by Keith Oliver in a Financial Times interview with Arnold Kransdorff78 it
would take more than a decade before supply chain management and risk
management would be discussed in an integrated manner. Ritchie and
Marshall, and Sadgrove - in separate publications - are among the first to
mention supply chain disruptions as a risk factor for business performance,
while it are Richie and Brindley first developing a simple supply chain risk
model to map risk factors impacting global supply chains.79
76 Covello 1983; Fischhoff et al. 1985; Slovic 1987; Fischhoff 1995; Slovic and Weber 2002; Slovic andPeters 2006; Ersdal and Aven 2008.
77 ISO 2009b, p. 7, clause 5.78 Oliver and Webber 1982.79 Richie and Marshall 1993; Sadgrove 1996, pp. 51-56; Richie and Brindley 2000.
Establishing the context
Risk assessment
Risk identification
Com
mun
icat
ion
and
cons
ulta
tion
Risk analysis
Risk evaluation
Risk treatment
Mon
itori
ng a
nd r
evie
win
g
Page 21
Supply Chain Risk Management (SCRM) has received increasing attention
over the past decade, given that cross-border collaboration within supply
chains through outsourcing and off-shoring has intensified over the past
decades resulting in longer, more complex supply chains. The growing
complexity of modern supply chains is attributable to a drive for cost
reduction to make supply chains as efficient as possible in moving a product
or service through a process of activities towards customers to satisfy their
demands; resulting in high levels of customer satisfaction at low cost. The
unpredictability of the business environment and economic downturn,
continuous improvement initiatives / process improvement strategies like
just-in-time (JIT) management, total quality management (TQM), six sigma
and lean manufacturing, strategies to reduce supplier base and an increase
in extreme weather events have made supply chains more vulnerable to
climate risk events.80 What makes supply chains leaner and more
responsive in a stable environment also increases their vulnerability to low-
probability/high-impact risk events.
Supply chains are not only vulnerable to disruptions in their network,
infrastructure and assets within nodes and links, but due to high levels of
inter-connectedness and inter-dependencies they are increasingly
vulnerable to disruptions on the side of their suppliers, customers, transport
providers, communication lines and other elements in the wider supply
chain environment.81 An overview of some of the elements mentioned as
ameliorating supply chain vulnerability towards climate risk events is given
in Figure 3 on the next page.
The focus of this research will be on introducing climate risk sources, events
and indicators into Supply Chain Risk Management (SCRM) with a main
focus on the risk assessment phase. Climate risks need to be understood to
initiate their efficient management through the development of risk
response and control plans in order to improve supply chain resilience
towards climate risk events - including extreme weather - to be called
climate proofing.
80 See footnote 36.81 Cranfield University 2003a and 2003b; Sheffi 2005a and 2005b; Sheffi and Rice 2005; Enyinda,
Ogbuehi and Briggs 2008; Meena, Sarmah and Sarkar 2011; WEF 2012; Wright and Datskovska2012.
Page 22
Figure 3: Supply chain trends and climate risk
According to ISO 31000 Risk Management Principles and Guidelines82, risk
management is the coordinated activities to direct and control an
organization with regard to risk and it also refers to the architecture that is
used to manage risk, including risk management principles, a risk
management framework, and the risk management process.
Inspired by the triple bottom line (3BL) concept Carter and Rogers83 define
SCRM as the ability of a firm to understand and manage its economic,
environmental, and social risks in the supply chain. 84 The focus of this
research will be on climate risk sources, being an element of environmental
performance potentially influencing economic and social performance.
Though climate proofing is expected to have an impact on all 3BL elements,
these are not explicitly taken into account in the risk assessment process.
82 ISO 2009b, p. 2.83 See footnote 19.84 Carter and Rogers 2008, p. 366.
Outsourcingand off-shoring
Longer supplylines, increase in
nodes
Complexcommunication
networks
Increase inproduct
complexity
Increase inextreme
weather events
Continuousimprovement
initiatives Less inventories,buffer stockreduction
Increase insingle sourcing
Increased supplychain vulnerability
towards climate risksources and events Extensive
sub-contracting
Geographical areasof productionspecialization
Page 23
Hazards, risks and potential consequence
Before continuing to discuss the supply chain risk management process, it is
good to take a step back and get a clear view of technical terms as defined
in the Glossary and their possible interaction. One term used next to risk is
the term hazard. Hazards are potential sources of harm or danger.85
Hazards can develop into risk sources, which can be used as risk indicators
or as part of a multidimensional risk indicator score. While not every hazard
will result in a risk source developing into a risk event and giving rise to
supply chain risk, every risk event originates from a hazardous condition.
Vulnerability is the degree to which a system is unable to cope with
certain risks, and a function of the character, magnitude, and rate of a risk
event to which a system is exposed, its sensitivity, and its adaptive
capacity.
Sensitivity and adaptive capacity are both elements of the system being
exposed, the first being the degree to which a system is affected and the
latter the ability of a system to adjust to a risk event, moderate potential
damages or cope with the consequences.86
The potential risk consequence or impact is a function of both the
vulnerability and the level of risk exposure. The essence of most
disruptions is a reduction in capacity and therefore an inability to meet
demand 87, which often translates into time delays and economic losses.
Where sensitivity focuses on the degree of the system being affected, risk
exposure focuses on the degree to which a system is being exposed to a
risk, irrespective of its sensitivity.
But what is seen as an acceptable risk to one company might not be
acceptable to another. The risk acceptance level is the level of risk to
which one makes an informed decision to take a particular risk, and/or the
moment where decisions towards active crisis management or contingency
planning are made.
85 ISO 2009a, p. 6; Kouvelis et al. 2012.86 See footnote 50.87 Sheffi 2005b, p. 14.
Hazard Risk source Risk Event Risk
Page 24
Figure 4 provides a visual representation of the relationships discussed.88
The risk level in the end is the magnitude of a risk expressed in terms of
the product of the likelihood of occurrence of a certain (future) risk event
and the likely consequences or impact the event is expected to bring about,
informed by the companys risk acceptance level. This is often represented
in a heat map89, risk map90 or risk matrix91 as shown in Figure 5 on the
next page, in which risk levels are - in this case grouped into low,
medium, high or extreme.
Figure 4: Hazards, risks and consequences
The risk matrix in Figure 6 on the following page shows an alternative
representation, with 4 consequence/likelihood groupings. It also includes an
example of the type of action required in relation to risk event positions.
The visualization is an example of a risk matrix for a specific risk event in
one specific company. The type of action required differs for each company,
sector, type of risk event, risk acceptance level, etc. and could even be
developed for one specific node within a supply chain.
88 See footnote 61.89 SCRLC 2011.90 Norrman and Jansson 2004; Crawford and Seidel 2013, p. 15 and 32.91 Norrman and Jansson 2004; McCormack et al. 2008; ISO 2009a; Agrawala et al. 2010; IRM 2010;
ODI 2010; Kouvelis et al. 2012; Vilko 2012; Crawford and Seidel 2013, pp. 65-69.
Riskexposure Sensitivity
Potential riskconsequence /
impact
Climate risk level
Adaptivecapacity
Vulnerability
RiskLikelihood
Climate hazard risk source risk event
Risk acceptancelevel
(risk appetite)
Page 25
Figure 5: Example of a risk matrix with risk levels
Figure 6: Risk matrix, including type of action in case of a risk event92
92 Kouvelis et al. 2012, p. 9, fig. 1.2.
Risk likelihood
Veryunlikely Unlikely
Verylikely
LikelyModeratelylikely
Cri
tical
Seve
reM
oder
ate
Min
orN
eglig
ible
Ris
k co
nseq
uenc
e /
impa
ct
Low
Medium
Medium
Low
Medium
Low
Medium
Medium
Medium
High
Low
High
Medium
Medium
Extreme
Medium
High
Medium
Medium
Extreme
Medium
Extreme
High
High
Extreme
Risk likelihood
Veryunlikely Unlikely
VerylikelyLikely
Moderatelylikely
Cri
tical
Seve
reM
oder
ate
Min
orN
eglig
ible
Minor consequencesHigh likelihood
Severe consequencesHigh likelihood
Severe consequencesLow likelihood
Minor consequencesLow likelihoodR
isk
cons
eque
nce
/ im
pact
= Do nothing = Crisis management
= Contingency planning = Buffering / pooling
Page 26
Origin of risk sources and operational levels
The discussion in Paragraph 1.2 on research groupings in early risk
management93 revealed that when talking about environmental risks, the
risk source can be approached from a technological or human activity
perspective, or from an environmental and natural resource management
perspective. A consequence of current-day increased human-nature inter-
connectivity in the natural environment is that environmental or climatic
risks will always have some component of human origin.94 And though a
climate risk event might impact supply chains on process-level, this will
primarily be due to the knock-on effects from higher operational levels
impacted.95 It probably is not the supply chain level where the main hazards
and risk sources originated from.
The SCOR model of the Supply Chain Council96 - an often-used reference
model towards improving supply chain performance - does consider supply
chain risks, but mainly looks at them as internal, upstream or downstream.
It does mention the global environment, but not how to take it into
account.97 More authors look at supply chain risk management, risk sources
and how to cope with risk events from a supply chain processes and
linkages perspective, using groupings like supply vs. demand side risks,
suppliers vs. customer, supply-demand-product-information risks, inbound
or outbound, or exogenous vs. endogenous.98
There are others who take a broader perspective on risk sources, looking at
risk categories, risk types or risk breakdowns,99 focusing on natural risk
events and/or macro levels,100 or departing from the risk management
approach or strategy taken instead of the actual risk source.101
93 See footnotes 69 and 70.94 World Bank 2010.95 See footnote 81.96 SCC 2011.97 Sinha, Whitman and Mazahin 2004; McCormack et al. 2008; Pujawan and Geraldin 2009.98 Michalski 2000; Giunipero and Eltantawy 2004; Sinha, Whitman and Mazahin 2004; Zsidisin et. al.
2004; Kleindorfer and Saad 2005; Cucchiella and Gastaldi 2006; Faisal, Banwet and Shankar2006a; Tang 2006; Gaudenzi and Borghezi 2006; Oke and Gopalakrishnan 2009; Trkman andMcCormack 2009; Olson 2011; Kern et al. 2012.
99 Harland, Brenchley and Walker 2000; Chopra and Sodhi 2004; Spekman and Davies 2004; ISO2007; Ritchie and Brindley 2007; Tang and Tomlin 2008; Tang and Numaya 2011; Tummula andSchoenherr 2011; Cagliano et al. 2012; Vilko and Hallikas 2012.
100 Wagner and Bode 2006; Reese 2007; Skelton 2007; Bessant 2008; Wagner and Bode 2008; Raoand Goldsby 2009.
101 Franck 2007; Muzumdar 2011.
Page 27
What becomes clear is that, whichever perspective is taken, supply chains
cover, are embedded in and influenced by risk events originating from and
coming into existence on various operational levels, eventually impacting
the supply chain on process level. The overview of operational levels and
their interdependency presented in Table 2 is based on Cranfield
Universitys publications and teachings on SCRM:102 103
Level 1
Process / value stream
The supply chain is seen as a pipeline or value stream at
process level running through and between networked
organizations. Supply chain risks originating at this level
are often linked to financial or commercial risks due to
poor supply chain performance, demand volatility and
shifting marketplace requirements.
Level 2
Assets and
Infrastructure
Dependencies
One level higher are the communications, transport and
distribution infrastructures connecting fixed sites and
facilities, i.e. linking the nodes. Assets are the assets of
these sites and facilities as well as assets used in the
various infrastructures connecting the nodes. Risks
originating at this level relate to the inter-organizational
communication, transport and distribution
infrastructures and the failure of related assets.
Level 3
Organisations and
Inter-organisational
Networks
Supply chains are viewed as inter-organizational
networks, in which organizations have their specific
business strategies and micro-economics. Power
dependencies, trading relationships, business and
sourcing strategies are among this levels main risk
sources.
Level 4
The wider
environment
The final level is the macro-economic and natural
environment, in which business takes place, assets and
infrastructure are located and supply chains flow.
Sources of risk are beyond the control of one company
or even an inter-organizational network.
Table 2: Operational levels, risk sources events and consequences
102 Cranfield University 2003a and 2003b.103 Cranfields operational levels are comparable to Olsons (2011, page 44, Table 4.1) value hierarchy
of supply chain risks. It is not clear whether he analyzes identified risks in isolation from oneanother or takes into account amalgamation of risk sources and/or knock-on effects of riskconsequences.
Page 28
Operational level 4 is where a combination of multi-level risk sources will
translate into climate risk events impacting lower organizational levels,
impacting the supply chain either directly or through knock-on effects, as
presented in Figure 7 below.
While climate risk sources can develop into risk events on their own, they
often dont take place in isolation and frequently are a compounding,
contributing factor or risk trigger adding to existing or evolving lower-level
risk sources. Climate risk events can result in direct climate risk
consequences or indirect consequences through the exacerbation of existing
organizational, infrastructural and supply chain level vulnerabilities.
An example is presented in Annex 2 in which the July-November 2011
Thailand floods and their risk consequences for the global production and
supply of computer hard disks is discussed, touching upon the use of
technical terms in risk management, the operational levels and the origins
of risk sources.
Figure 7: Operational levels, risk origin and level of control104
104 See footnote 102.
Level of control
High level of control Low level of control
Exte
rnal
Inte
rnal
Ris
k /
Vuln
erab
ility
ori
gin
Operational level 1Value chainSupply chain
Processes & workflows
Operational level 2Asset and infrastructure
interdependencies
Operational level 3Inter-organizational networks;business strategies / micro-
economics
Operational level 4The natural environment
Macro-economics
Risk event
Page 29
1.4 Supply Chain Risk Management ProcessThere are various Supply Chain Risk Management Process (SCRMP) models
and approaches. Some of these depart from risk management sciences105,
while others depart from supply chain performance improvement models or
operations research106. Differences are mainly found in their reach regarding
risk sources and operational levels taken into account, risk treatment,
decision making and the reviewing and feedback parts of the models. A
comprehensive SCRMP is presented on the following page in Figure 8. The
model is based on generic ISO 31000 risk management process - the most
widely used and accepted risk management standard - amalgamated with
elements of Tummala and Schoenherrs model.
Given the researchs focus on climate risk sources and taking into account
the limited research timeframe, the focus will be on the risk assessment
phase, further discussed in the following paragraph.
1.5 Supply Chain Risk AssessmentRisk assessment consists of risk identification, analysis and evaluation -
though different descriptions are used for these steps in academic
literature.107 The risk assessment model used is visualized Figure 9 and
based on the comprehensive SCRMP presented of Figure 8.
Risk identification is part of Research Objective 1 (RO1) and Research
Objective 2 (RO2), the first focusing on identifying, recognizing and
describing climate risks and the latter aiming at identifying the perceived
extent of negative consequences of climate risks identified. Part of this
process is the identification of risk indicators used in SCRMP, which is what
Research Objective 3 (RO3) focuses on.
105 Norrman and Jansson 2004; Kleindorfer and Saad 2005; Cucchiella and Gastaldi 2006; ISO 2009aand 2009b; SCRLC 2011; Tummala and Schoenherr 2011.
106 Sinha, Whitman and Mazahin 2004; Gaudenzi and Borghesi 2006; McCormack et al. 2008; Pujawanand Geraldin 2009; Olson 2011; Olson and Wu 2011; SCC 2011.
107 Harland, Brenchley and Walker 2003; Kleindorfer and Saad 2005; Cucchiella and Gastaldi 2006;ISO 2009a and 2009b; Pujawan and Geraldin 2009; Tummala and Schoenherr 2011; Kern et al.2012.
Page 30
Figure 8: A comprehensive supply chain risk management process model108
The identification of climate risk categories109 used in SCRMP is also part
of Research Objective 3 (RO3). Risk consequence, risk likelihood and
risk level the risk analysis element are all part of Research Objective 4
(RO4), which also contains the element of risk ranking against risk
acceptance levels. The risk consequence is also part of Research
Objective 2 (RO2), though in Research Objective 4 (RO4) this information
is used to further analyze climate risks and come to a possible risk ranking.
108 Based on ISO 2009a and 2009b; Tummala and Schoenherr 2011.109 See footnote 99.
Supply chain drivers(context)
Risk assessment
Risk identification
Risk analysis
Risk measurement
Risk assessment
Risk evaluation
Risk treatment
Risk mitigation andcontingency plans
Risk control and monitoringSu
pply
and
log
istic
sEv
alua
tion
crite
ria
&Pe
rfor
man
ce m
easu
res
Com
mun
icat
ion
and
cons
ulta
tion
Ris
k ca
tego
ries
Mon
itori
ng a
nd r
evie
win
g
Supply chainmanagement
decisions
= ISO31000 standard(2009a and 2009b)
= Tummala and Schoenherr (2011)
Page 31
Figure 9: Supply chain risk assessment flowchart110
1.6 Climate risks and their consequencesDespite concluding that leaner and more responsive supply chains in a
stable environment are more vulnerable to disruptions once the
environment turns unstable111, the question remains whether supply chain
managers perceive climate risk events as being of growing concern to their
operations.
Moreover, despite an agreement on climate change112 is there proof of an
increase in climate-related risk events? Or are events like for example
hurricanes Ivan, Frances and Charley (2004), hurricanes Katrina, Rita and
Wilma (2005), winter storm Kyrill (2007), hurricane Ike (2008), the
Thailand floods (2011 - Annex 2), hurricane Sandy (2012) etc. isolated
anomalies and climate risk management should focus on the increased
vulnerability of supply chains instead of an increase in climate risk events.
110 See footnote 107.111 See footnotes 36 and 81.112 See footnotes 5, 6, 16 and 17.
Risk assessment
Risk identification
Risk analysis
Risklikelihood
Ris
k ca
tego
ries
Riskconsequence
Risk level
Risk evaluation
Risk ranking
Risk acceptance levels
Page 32
Swiss Re reinsurance and consulting company has been publicizing yearly
reports on natural catastrophes and man-made disasters and their financial
impact113. Their data indicates that the number of natural catastrophic
events have been rising steadily since 1970, shown in Figure 10 below. For
the last three years there have been more natural risk events than man-
made ones.114 This in itself does not show a pattern115, but there has been a
constant growth in the yearly number of natural catastrophes over the past
40+ years.
Figure 10: Major global risk events 1970-2012116
Though not providing a complete picture or one that can be aggregated
over longer time periods117, the data suggests an increase in the average
economic loss per natural catastrophe as presented on the following page in
Figure 11, underpinning the growing need for climate risk management.
It should be noted that earthquakes and volcanoes are also counted in the
grouping of natural catastrophes, but the research base on the linkages
between climate change and the occurrence of earthquakes and volcanoes
is still in its infancy. Early research suggests that climate change affects
113 Zanetti et al. 2004; Zanetti, Schwarz and Enz 2005; Zanetti and Schwarz 2006; Zanetti, Schwarzand Lindemuth 2007; Enz et al. 2008; Enz, Zimmerli and Schwarz 2009; Rogers, Mehlhorn andSchwarz 2010; Bevere, Rogers and Grollimund 2011; Bevere et al. 2012 and 2013.
114 Events are included as catastrophic or disastrous if insured claims, total economic losses or thenumber of human casualties exceed certain set thresholds.
115 Given the short time frame of 3 years and also a simultaneous decrease in man-made disasters.116 Bevere et al. 2013, p. 2, fig. 1.117 Due to the short time frame for which data was available. See footnote 113.
Page 33
tectonic plate movement causing earthquakes, and thinning ice sheets may
trigger dormant volcanoes, but there is no consensus on these viewpoints in
the scientific community.118 Earthquakes and volcanoes are as such not
seen as climate risk events and not taken into account in this research
study.
Figure 11: Average total economic losses (USD) per natural catastrophe119 120 121
But are supply chain and risk management professionals concerned about
climate risk sources and their potential impact on supply chains?!
Respondents to a survey by the World Economic Forum (Figure 12) rated
natural disasters as risk sources122 potentially having the highest
consequence on global supply chains and being outside the organizations
control. Extreme weather events were also rated as having a potentially
high impact and being outside the organizations sphere of influence.
118 Iaffal