Supply chain networks are more exposed to external disruptions than ever before. Next to cyber-attacks, adverse weather conditions are one of the biggest threats business operations can face, causing billions of losses. However, most companies are not well-prepared for natural or man-made disasters, opening an important opportunity to improve risk analysis and prescribe actions to minimize their impact on supply chains.
Supply chain management has become more complex than ever. Companies experience increasingly volatile demands while at the same time facing new economic, technical and regulatory pressures. In today's globalized world, businesses are therefore urged to accelerate supply chain integration in order to respond faster and more effectively to challenging demands. This new complexity leaves supply chain networks more exposed to external disruptions than ever before.
These disruptions, often due to natural or man-made disasters, have dramatic effects on businesses, impacting logistics and company reputation and causing millions of losses. The Business Continuity Institute (BCI) investigated supply chain disruptions across 76 countries with 589 respondents in 2018, half of whom were based in the EU. Their findings showed that 56 % had suffered a supply chain disruption in the past 12 months, and more than one in ten experienced losses of over a million Euros. These disruptions are expected to grow in the future due to demographic density, climate change, and increasingly complex networks, emphasizing the urgency of effective risk management and resilient supply chains.
Weather-related supply chain disruptions cause significant global losses
According to the BCI study, the most severe causes for disruptions are adverse weather conditions and cyber-attacks. In general, adverse weather conditions are one of the biggest threats interconnected supply chains can face since they lead to significant losses. Just recently, in September 2018, a 6,7 magnitude earthquake in Hokkaido followed by the tropical storm Jebi caused hundreds of millions (USD) of losses for Japanese manufacturers, severely affecting large international players such as Toyota and Mitsubishi. One of Toyota´s key plants for engine parts and transmissions in Hokkaido was forced to temporarily shut down due to lack of electricity and the operational standstill of ports, airports, and trains.
Zooming in on Europe, the European Environment Agency found that between 1980 and 2017 the economic loss caused by weather and climate-related extremes amounted to approximately EUR 453 billion with the two most costly events being the 2002 flood in Central Europe (€21 Bn.) and the 2003 drought and heat wave (€15 Bn.). A recent example of a significant supply chain disruption was caused by the 2018 heat wave in Central Europe that temporarily decreased freight transfer along the Rhine river. Ships were not able to carry full loads due to low water levels, posing challenges for many industrial sectors, amongst others, coal power plants, the energy supplier RWE and many fuel providers.
Cold waves can be equally damaging, causing delays at airports and highways at significant costs. In January 2018, the winter storm Grayson, described as a ‘bomb cyclone’, caused delays and closures for shippers and carriers along the entire Eastern U.S. seaboard. Cars caught on ice-covered roads in Boston were abandoned and the Chicago river froze over after the storm strengthened, leaving millions of Americans facing arctic conditions with temperatures as low as -38°C. Consequently, ports, airports, railways, and trucking operations were delayed or shut down for several days, causing significant losses.
The above-mentioned examples show that the impact of weather disruption to supply chain operations is serious. According to Swiss Re, 327 disaster events occurred in 2016 and this value reflects the tendency of a gradual but significant increase in the number of catastrophes in the last 40 years. These events severely affect transportation capacity, temporarily making freight shipment more expensive as well as causing supply bottlenecks since providers are forced to use other means of transportation. A chain is only as strong as its weakest link, meaning entire business operations will be affected economically by such a disruption. Although most businesses outside of the concerned regions do not face any physical damage, many experience considerable uninsured business interruptions and losses due to extra expense in their supply chain. This means that not only the direct, but also the indirect effects should to be considered.
Catastrophes are increasing – precautions are not following up
The increasing vulnerability of interconnected supply chains raises the question of how companies can manage their risks and improve supply chain resilience more effectively. Considering the billions of costs these natural hazards can bring upon companies, one would think that insuring such losses is self-evident. However, the gap between actual and insured losses is extremely large, with most events not being insured at all. This tendency is global, but can however be well illustrated by looking at the case of Italy. The country has a high risk of natural disasters as 90 % of Italian municipalities are exposed to risks from landslides, floods or earthquakes (SwissRe). However, the Italian insurance market is characterized by low penetration of natural disasters covers and the government has only limited funds reserved for these kind of events (Porrini). To give an example, of the +25,000 Italian churches, around 70 % are protected against fire and only a selected few have natural catastrophe coverage despite the high exposure (SwissRe). It is self-evident that in the future, transportation systems and supply chains will have to plan for accelerated climate change and extreme weather events. Recent transformations in the sector have made supply chains more digital and data driven, where many developments enable solutions that mitigate weather-related threats.
Especially data-driven approaches have already revolutionized specific areas of the supply chain, assisting the maintenance and monitoring of real-time data. Rotterdam’s port has under-water drones detecting water levels and obstacles. Radar capabilities help truck drivers to predict extreme road conditions and solar roadways can melt ice and snow in Japan. To give a specific example, Maersk launched its refrigerated container monitoring program in 2015, where shipments can be tracked in real-time by fitting them with sensors that communicate through cell phone networks and satellites. Regular updates on the reefer’s location, temperature, and the atmospheric conditions are sent, which enables the remote control of the container. Such technologies are relevant since they make the precise monitoring of temperature and humidity for weather sensitive products possible e.g. for biologic or biopharmaceutical medicine. Even the smallest advancement in predicting, measuring and controlling weather related factors is an improvement for anticipating business disruptions.
How data-driven insurance can secure resilient supply chains
In general, the development towards cheaper sensors and better connectivity expands the accessibility of IoT throughout the supply chain and so increases the number of devices that can provide real-time data about weather related conditions. For example, GE Current has recently installed smart streetlights throughout San Diego that can monitor light, humidity, and air quality. However, while the amount of data collected continues to increase, there are still challenges with analyzing and centralizing the data. This means there is an important opportunity in improving risk analysis in order to predict weather events but also to prescribe actions to minimize its impacts.
Prescribing actions to minimize the effect of weather incidents is something traditional insurance products have offered for many years. However, the Non-Life insurance sector currently often lacks transparency, is expensive and despite the urgency, insurers are slow at processing claims. The pressing matter of this topic requires faster and more effective solutions which is why new InsurTech players are emerging and growing. These players are not just revolutionizing the way weather risks are assessed – but also how entities, companies and people facing them are economically protected. Using new technologies, such as image recognition or machine learning, combined with the advanced data sources, such as satellites or IoT, can significantly improve transparency, speed and risk assessment. For example, satellite imagery can be used to detect scorched areas after a wildfire, find clouds responsible for hailstorms or evaluate water quality by identifying the spread of algae bloom. The main advantages of using such methods is that they enable greater precision in risk assessment and increasingly rapid payouts, sometimes within a few hours, ensuring that supply chains can return to their usual operations swiftly. This leaves behind stronger and more resilient supply chains behind that can bounce back from adversity and disruptions as fast as possible without facing significant losses.