Extreme Weather Becomes a New Supply Chain Challenge

Several key weather incidents have disrupted logistics and manufacturing processes in recent years and significantly impacted supply chains worldwide. 

In 2018 and 2022, drought episodes led to critically low water levels in the Rhine, severely limiting inland shipping and choking German industry. Just this past January, FedEx warned of delivery delays due to winter weather, activating contingency plans following “substantial disruptions” at a critical US hub. 

During the 2020 wildfire season, fires disrupted key transportation corridors of California’s logistics network, such as highways and rail lines, causing closures at various points along the supply chain, including distribution centers and warehouses. Critical routes like I-5, which connects northern and southern California, were either threatened or temporarily closed due to the fires, impacting the movement of goods.

The first major hurricane of the 2024 Atlantic season, Hurricane Beryl, barrelled toward Northern Mexico, posing a significant threat to critical supply chain routes. Today, Hurricane Helene is approaching landfall on the Florida Gulf Coast.

Severe weather incidents have the potential to disrupt logistics and manufacturing processes and significantly impact supply chains—and the likelihood is pretty great.

The High Cost of Extreme Weather

Everstream assigns extreme weather a 100% risk score, indicating a certainty that weather will significantly disrupt supply chains. Billion-dollar weather events in the US have escalated from occurring every four months in the 1980s to every three weeks today, signaling a new normal of frequent and severe weather disruptions.

The Panama Canal is experiencing its worst drought since 1950, resulting in strict draft height restrictions and daily vessel transit limits, causing delays for bulk carriers, freighters, and tankers. Winter storms, intensified by record-high ocean temperatures, are expected to continue causing delays and cancellations. The forecast for 2024 indicates a persistence of extreme weather events, further challenging supply chain reliability.

Extreme weather has become a critical challenge for electronic supply chains, affecting their stability and reliability more frequently and severely. Several key factors highlight how weather events are disrupting global logistics and manufacturing:

Increased Frequency and Severity of Weather Events: Intense weather events, including hurricanes, floods, droughts, and wildfires, can halt production facilities, damage infrastructure, and disrupt transportation routes, causing delays and increasing costs.

Disruption of Transportation Networks: Extreme weather often leads to the closure of key transportation routes. For example, hurricanes can shut down ports and airports, floods can make highways impassable, and wildfires can damage rail lines. This results in delays in the delivery of raw materials and finished goods, as seen with the wildfires in California and severe storms in the Midwest.

Impact on Manufacturing Facilities: Many manufacturing facilities, especially those in vulnerable regions, face operational disruptions due to extreme weather. Flooding, power outages, and structural damage can halt production lines. For instance, during the severe flooding in Thailand in 2011, the production of hard disk drives was significantly affected, leading to a global shortage and price increases.

Supply Chain Resilience and Adaptation: Businesses are increasingly investing in supply chain resilience to mitigate these risks. Strategies include:

• Diversifying supplier bases.
• Increasing inventory levels.
• Investing in robust infrastructure.
• Leveraging technology for better forecasting and risk management.

Advanced analytics and AI are used to predict weather impacts and optimize supply chain responses.

Broader Economic Implications: The broader economic impacts are substantial. Supply chain disruptions lead to increased production costs, which are often passed on to consumers. They can also lead to shortages of critical components, slowing down production in various industries, from automotive to consumer electronics.

Disruptions caused by climate change impact all parts of the supply chain: Weather is the cause of 23% of all road delays in the US and costs trucking companies annually between US$2bn and $3.5bn.

Weather-related disruptions have cascading costly effects. The electronics industry relies heavily on timely and precise component delivery and faces significant extreme weather challenges, which can lead to delays, revenue loss, and increased costs. The semiconductor industry is particularly sensitive to supply chain disruptions caused by extreme weather. For example, the 2021 winter storm in Texas forced semiconductor plants to shut down, further exacerbating the global chip shortage. 

To mitigate the impacts of extreme weather incidents, companies are integrating advanced weather forecasting technologies and developing more resilient supply chain strategies. 

Industry Responses

Industries are responding by implementing policies and practices aimed at mitigating the impact of extreme weather. These include improving infrastructure resilience, enforcing stricter building codes, and encouraging the adoption of sustainable practices to reduce the long-term effects of climate change.

Companies like Taiwan Semiconductor Manufacturing Company (TSMC) and Intel are now focusing on enhancing their supply chain resilience to prevent future disruptions.

TSMC has invested heavily in water recycling and conservation technologies to mitigate the impact of droughts. It has also diversified its manufacturing footprint to reduce the risk associated with natural disasters in any one region. Meanwhile, Intel CEO Pat Gelsinger wants to create "the world’s most resilient supply chain."

From global rebalancing to sustainability initiatives, Intel is finding effective ways to build a more resilient semiconductor supply chain. It’s a road map others can learn from. 

“It’s my hope that by driving both structural and operational improvements, by learning more and having more transparent supply chains, and by putting more intrinsic resilience into our supply chains, we’ll be able to make the promise of uninterrupted supply a literal reality for our customers in the future,” said Jackie Sturm, Corporate Vice President of Global Supply Chain Operations at Intel.

Mitigation Strategies

The increasing incidence and severity of extreme weather events pose significant global challenges to supply chains. Companies and governments must continue to innovate and invest in resilience strategies to adapt to this new reality and ensure the stability of supply chains in the face of ongoing climatic disruptions.

Companies can respond to and mitigate the risks posed by extreme weather events through various strategies to enhance supply chain resilience, improve risk management, and adopt sustainable practices. Here are several key approaches companies are taking:

Diversification of Supply Chains

Engage with multiple suppliers from varying locations to reduce the risk of disruption from localized weather events. For instance, having suppliers in coastal and inland regions can mitigate the impact of hurricanes or flooding.

Moving production closer to end markets can help decrease reliance on long-distance transportation networks, which are inherently more vulnerable to weather disruptions.

Enhanced Risk Management and Forecasting

Leverage predictive analytics and AI to forecast weather patterns and assess their potential impact on supply chains. This allows firms to manage risks more proactively and plan alternative logistics routes.

Implementing real-time monitoring systems to track weather conditions and their impact on transportation and production can help teams make timely decisions to reroute shipments, adjust production schedules, or advise internal or external customers of delays or issues.

Infrastructure and Facility Resilience

Invest in infrastructure that can withstand extreme weather conditions, such as reinforced buildings, flood defenses, and resilient power supplies. For example, ensuring manufacturing plants are equipped to handle severe storms or installing backup power generators to maintain operations during outages.

Geographical diversification helps to ensure continuity in production and supply. Distribute manufacturing and storage facilities across multiple locations and geographies to minimize the risk of a single point of failure. 

Inventory Management

In contrast to just-in-time inventory, just-in-case inventory strategies involve keeping extra inventory on hand to mitigate the risk of supply chain interruptions. Maintaining higher levels of safety stock for critical components can buffer against supply chain disruptions. However, this approach requires careful balance to avoid excessive holding costs and obsolescence.

Collaboration and Partnerships

Collaborating with suppliers is critical to managing extreme weather risks in the supply chain. By developing joint risk management plans, businesses and suppliers can better anticipate disruptions from events such as hurricanes, wildfires, or floods and minimize impacts.

A key strategy is diversifying logistics networks. Rather than relying on a single route or transportation hub, businesses can work with suppliers to create multiple shipping options, alternative warehousing locations, and redundant supply lines. This ensures that companies can quickly pivot to alternative routes or facilities to avoid delays when extreme weather hits- such as wildfires disrupting key highways.

In addition, shared investments in technology play a vital role. Real-time monitoring tools and predictive analytics can alert both partners to weather risks early, allowing for faster decision-making. Automated systems and AI-driven demand forecasting further help by optimizing supply chain operations in anticipation of potential disruptions.

By partnering with suppliers to enhance logistics flexibility and invest in predictive technologies, companies can better withstand extreme weather risks and ensure business continuity, protecting the flow of goods even in the face of significant environmental challenges.

Employee Training and Development

Regular employee training on disaster preparedness and response can improve the company’s ability to maintain operations during and after extreme weather events. Establish dedicated emergency response teams responsible for coordinating and executing response plans during emergencies.

Disruptions caused by extreme weather events can cripple transportation routes, shut down production facilities, and lead to costly delays and lost efficiencies. As the risks escalate, companies must take proactive steps to build more resilient supply chains. By collaborating with suppliers, diversifying logistics networks, and investing in advanced forecasting technologies, businesses can better anticipate and mitigate the impacts of weather-related disruptions. A proactive approach not only ensures business continuity but also enhances overall supply chain efficiency and sustainability.