climate proofing supply chains; identification of climate risk indicators to improve the supply...

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





Dennis Peter Bours










Dennis Peter Bours






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.

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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;

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.

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.

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.

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

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.

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

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

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)

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

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.

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.

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

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.

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)

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

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.

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

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