By Justin Floyd
The pandemic has taken much of the blame for the supply chain problems crippling the world’s economy, but a far greater challenge is already coming down the line – climate change.
The effect of climate change on supply chains is multi-layered. It is perhaps most evident in the production of goods, impacting crop yields as rainfall and temperature patterns alter. And it will affect where crops can be grown and make local supply more erratic and unpredictable.
Alongside this, climate change can also profoundly disrupt the ability to move goods from place to place. Around 90% of the world’s freight moves by ship. Rising sea levels threaten to overwhelm ports and coastal infrastructure. Land-based disruption from wildfires or floods could render certain distribution routes inaccessibly for prolonged periods.
It’s a significant headache for goods producers, brands, and distributors. All parties need to adapt their approach to become more agile and responsive – not easy, given that global supply chains are notoriously cumbersome and inflexible. However, the biggest hit may be felt by consumers, who will see the impact of this disruption in permanently higher consumer goods prices.
Climate change in action
The impact of climate on supply chains is not theoretical. It is already being seen in disruption across the world. In February 2022, for example, heavy rainfall and snowmelt burst the banks of the Rhine river, Europe’s most important commercial waterway. This triggered a halt in shipping, holding up goods distribution across Europe for several days. Later in the year, low water levels forced cargo ships to run with half their usual capacity.
In central China, flooding submerged large swathes of Zhengzhou, a major economic and transport hub, disrupting the supply chains for pigs, peanuts and coal. Inevitably, food prices in the surrounding Henan province, home to almost 100m people, edged higher as a result.
In truth, the world’s supply chains have been highly vulnerable to external shocks for some time. Many are too complex, convoluted, and opaque, with little visibility on end customer demand. The pandemic gave us a clear indication of the type of financial hit that results from a major shock. Global freight prices moved from $2,232 for a container in October 2020 to a peak of $10,996 in September 2021, adding huge costs onto the price of distributing consumer goods.
But while the pandemic exposed these problems, it did not create them. The issue is that the system can no longer recover from the last crisis before the next one hits, and as our climate problems intensify, crises are becoming more and more common. As a result, supply chain disruption contributes to inflation and makes essential consumer goods less affordable, particularly for lower income countries. This is bad news for everyone further up the supply chain, given that targeting lower income markets across Latin America and Africa will be essential to European FMCG brands’ growth over the next decade.
Is there a solution?
Supply chains need to become more adaptive – this much is clear. European FMCG brands understand the problem, but they are struggling to find the right solution, particularly when they’re trying to sell to multiple markets in different corners of the world. They have looked to increase inventories, buying warehouses closer to the point of distribution. They have moved away from ‘just in time’ supply chains that aim to concentrate production in the lowest cost countries. ‘Reshoring’ is becoming a global phenomenon.
Other brands have sought to create dual supply chains, whereby if their usual supply chain experiences difficulties, they have a reserve supply chain to prevent shortages. But it’s a costly solution that demonstrates the extent to which many of these problems lie outside of their control. There is a question over whether the end customer really has the capacity to bear these additional costs. And even this approach may not deliver the flexibility needed to combat the disruption from climate change.
Hence, as unexpected extreme weather events become increasingly common, FMCG companies need to go further, diversifying both their supplier base and the products they provide. This ensures consumers are not left stranded, but have a choice of products to suit their wallet and their lifestyle even at difficult moments. And by decentralising their distribution chains, brands can ensure they are not too dependent on a limited number of distributors, and have different pathways to market wherever they operate.
It’s time to open up global commerce
For too long, global supply chains have relied upon closed networks and strategic relationships in which one party – usually a monopolistic distributor – calls all the shots. It’s an uncompetitive and inefficient approach that, in the face of climate change, now appears entirely unsustainable.
The only way to prevent the cost of consumer goods from further spiralling is through open commerce, digitising our supply chains and bringing brands, distributors and retailers together on technology platforms that offer a level playing field for trading.
Imagine global marketplaces in which brands are uninhibited in how they plot their path to market. It’s an approach that will deliver an instant boost to the efficiency of all supply chains, while forever ensuring there are a range of options in the event of disruption. Open commerce cannot prevent the problems created by climate change, but it can significantly lessen the impact for European brands and the consumers that rely on their products.
As climate change intensifies, the world will have to do more with less. We will need to make sure our finite resources can feed eight billion people, that precious commodities and essential items do not rot or expire in warehouses because there isn’t the distribution capability to get them where they need to be. Open commerce is about ensuring that the world’s resources are used as efficiently as possible – a necessity in the face of a changing climate.
About the Author
Justin Floyd is an award-winning founder and entrepreneur with a 25-year track record of leading pioneering technology companies solving the world’s biggest challenges. He founded RedCloud to radically improve the accessibility and affordability of essential everyday products, in a way that profits everyone in the distribution chain.
References
- https://e360.yale.edu/features/how-climate-change-is-disrupting-the-global-supply-chain
- https://www.bloomberg.com/news/newsletters/2022-07-27/supply-chain-latest-germany-s-falling-river-rhine-adds-to-shipping-woes
- https://www.reuters.com/business/sustainable-business/coal-cars-chinese-floods-tangle-supply-chains-2021-07-22/
- https://fbx.freightos.com/
- https://www.spglobal.com/marketintelligence/en/news-insights/blog/why-are-international-supply-chains-still-disrupted
- https://www.bloomberg.com/news/articles/2022-11-02/us-manufacturers-pumped-up-about-supply-chain-reshoring-trend
