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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.
Originaltitel
Climate Proofing Supply Chains; Identification of Climate Risk Indicators to Improve the Supply Chain Risk Management Process (SCRMP)
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.
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.
Climate proofing supply chains I dentification of climate risk indicators to improve the supply chain risk management process ( SCRMP) Dennis Peter Bours The Robert Gordon University, Aberdeen, UK Aberdeen Business School MSc International Purchasing and Supply Chain Management Submission Date: 27 April 2014. End result: MSc w honors THE ROBERT GORDON UNIVERSITY ABERDEEN BUSINESS SCHOOL Climate proofing supply chains I dentification of climate risk indicators to improve the supply chain risk management process ( SCRMP) Dennis Peter Bours The Robert Gordon University, Aberdeen, UK Aberdeen Business School MSc International Purchasing and Supply Chain Management Submission Date: 27 April 2014. End result: MSc w honors THE ROBERT GORDON UNIVERSITY ABERDEEN BUSINESS SCHOOL Climate proofing supply chains I dentification of climate risk indicators to improve the supply chain risk management process ( SCRMP) Dennis Peter Bours The Robert Gordon University, Aberdeen, UK Aberdeen Business School MSc International Purchasing and Supply Chain Management Submission Date: 27 April 2014. End result: MSc w honors Page ii Abstract Purpose: What makes complex supply chains leaner and more responsive in a stable environment also increases their vulnerability to low-probability/high-impact risk events, like climate risk events. High levels of uncertainty of impact and occurrence of climate risk events make it hard for managers to guide their organization to take appropriate action. The main research objective is to study climate risks and related indicators as part of the Supply Chain Risk Management Process (SCRMP), to facilitate the development of risk management plans to improve supply chain resilience towards physical climate change and weather risk sources, to be called climate proofing. This research intends to complement existing research on supply chain risk management (SCRM) indicators and risk assessment, specifically focusing on climate risk events. Methodology: A mixed-method research approach was used, applying quantitative and qualitative approaches to develop different perspectives, triangulate research findings and reduce the risk of method bias. An iterative research design was developed in which stages of data collection - by means of a stepped literature review, interviews and an internet-mediated questionnaire - and reflection by a specially established research expert panel are successively utilized to inform, verify and refine subsequent research stages. Findings: 71% of respondents (strongly) agrees that supply chains have been more than marginally impacted by climate risk events over the past three years; though risk appetite is high and only 23.4% rates the impact of previous events on their supply chain as 'unacceptable'. Those impacted in the past rate the likelihood of future impacts higher, and probably more realistic, and put more emphasis on contingency planning and pre-incident preparation. Past impacts do not make people feel less empowered in relation to their organization's risk management. Page iii Climate risk likelihood indicators need to be place-based and contextual. Climate risk impact indicators should be a mix of cost, time and social indicators. The appropriateness of specific indicators and focus on particular climate risks depend very much on the individual company, the sector in which it operates, the operational environment and the geographic and climatic contexts in which its supply chains function. Keywords: Supply chain risk management Climate risk events Climate risk indicators Risk assessment Supply chain resilience Climate proofing Page iv Acknowledgements I don't think we're yet evolved to the point where we're clever enough to handle a complex a situation as climate change. We're very active animals. We like to think: Ah yes, this will be a good policy, but it's almost never that simple. The inertia of humans is so huge that you can't really do anything meaningful. James Lovelock, scientist, environmentalist and futurologist, 2010. 1 I would like to thank my RGU research supervisor Ms. Carol Air, the expert panel members, Mr. Colin Airdrie, Prof. Gyngyi Kovcs, Mr. Ira Feldman, Dr. J. Kevin Watson, Ms. Joyce Coffee, Dr. Laura Birou, Mr. Michael Keizer, Ms. Nancy Gillis, Mr. Peter Jones, Mr. Peter Murray, Dr. Sander de Leeuw, Prof. Steve Leon, Dr. Steven Dunn and Mr. Taylor Wilkerson, and special data analysis reviewer Mr. Joris Vandelanotte for their time, guidance, critical feedback and patience. A special word of thanks to my wonderful wife, Martine, for coping with this academic endeavour next to our already packed work schedules and lives. 1 Hickman 2010. Page v Table of Contents Abstract ............................................................................................. ii Acknowledgements ............................................................................. iv Table of Contents ................................................................................ v List of Figures ................................................................................... vii List of Tables ..................................................................................... ix List of Appendices............................................................................... ix List of Abbreviations ............................................................................ x INTRODUCTION...................................................................................1 I.1 Background to the Research.......................................................... 1 I.2 Overview of the Research Problem.................................................6 I.3 Research Questions......................................................................7 I.4 Objectives of the Study ................................................................ 8 I.5 Research Rationale ......................................................................8 I.6 Limitations..................................................................................9 I.7 Outline of the Report.................................................................. 10 GLOSSARY........................................................................................ 11 G.1 Climate Change Technical Terms and Definitions........................... 11 G.2 Risk Management Technical Terms and Definitions........................ 13 CHAPTER 1 LITERATURE REVIEW...................................................... 17 1.1 Introduction ............................................................................. 17 1.2 Risk Management...................................................................... 17 1.3 Supply Chain Risk Management .................................................. 20 1.4 Supply Chain Risk Management Process....................................... 29 1.5 Supply Chain Risk Assessment .................................................... 29 1.6 Climate risks and their consequences........................................... 31 1.7 Climate risk indicators ............................................................... 37 Page vi 1.8 SCRM and Management Decision-Making...................................... 41 1.9 A critical note on (risk) perception............................................... 46 CHAPTER 2 RESEARCH METHODOLOGY ............................................. 48 2.1 Introduction ............................................................................. 48 2.2 Literature Reviews..................................................................... 56 2.3 Expert Panel Interviews ............................................................. 59 2.4 Internet-Mediated Questionnaire................................................. 63 2.5 Expert Panel Reviewing.............................................................. 68 2.6 Data Analysis............................................................................ 69 2.7 Generalizability of Findings ......................................................... 70 CHAPTER 3 DATA FINDINGS............................................................. 71 3.1 Introduction ............................................................................. 71 3.2 Expert panel interviews.............................................................. 72 3.3 Internet-mediated questionnaire ................................................. 84 3.4 Summarizing the results per research objective .......................... 109 CHAPTER 4 DISCUSSION AND REFLECTION ..................................... 114 4.1 Introduction ........................................................................... 114 4.2 Critical analysis towards the research objectives ......................... 114 4.3 Critical analysis towards the research design .............................. 116 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS....................... 118 5.1 Conclusions towards the research objectives............................... 118 5.2 Impact of the study................................................................. 121 5.3 Recommendations for future research........................................ 121 LITERATURE LIST ............................................................................ 123 FURTHER READING.......................................................................... 152 Page vii List of Figures Figure 1: The triple bottom line concept .................................................4 Figure 2: The ISO 31000 risk management process ............................... 20 Figure 3: Supply chain trends and climate risk ...................................... 22 Figure 4: Hazards, risks and consequences ........................................... 24 Figure 5: Example of a risk matrix with risk levels ................................. 25 Figure 6: Risk matrix, including type of action in case of a risk event ....... 25 Figure 7: Operational levels, risk origin and level of control .................... 28 Figure 8: A comprehensive supply chain risk management process model .............................................................................. 30 Figure 9: Supply chain risk assessment flowchart .................................. 31 Figure 10: Major global risk events 1970-2012...................................... 32 Figure 11: Average total economic losses (USD) per natural catastrophe .................................................................... 33 Figure 12: Risk sources of global supply chain disruptions ...................... 34 Figure 13: Risk matrix, including climate risk events.............................. 35 Figure 14: Risk treatment options........................................................ 45 Figure 15: Luyt's 'Measurement development, validation, revision framework' ....................................................................... 50 Figure 16: Simplified version of Newman, Lim and Pinedas Mixed methods research interactive continuum.............................. 51 Figure 17: The iterative mixed-method research design ........................ 52 Figure 18: Stepped literature review approach ...................................... 57 Figure 19: Link between researcher and respondents............................. 64 Figure 20: Questionnaire design process .............................................. 65 Figure 21: Interview Q1: Supply chains impacted.................................. 72 Figure 22: Objective use of risk matrices.............................................. 77 Figure 23: Specific, existing or no risk category..................................... 81 Figure 24: Questionnaire respondents' gender ...................................... 84 Figure 25: Questionnaire respondents' field of work............................... 85 Figure 26: Sector in which the respondents' organization operates .......... 86 Figure 27: Specific sector on which the respondents organization focuses ............................................................................ 86 Figure 28: Size of the respondents' organization ................................... 87 Page viii Figure 29: Respondents' years of experience in the sector of employtment .................................................................... 88 Figure 30: Respondents' years of experience in their field of work ........... 88 Figure 31: Respondents' level of responsibility ...................................... 89 Figure 32: Respondents' region of employment ..................................... 90 Figure 33: Respondents' region of origin............................................... 91 Figure 34: Location of respondents' organization's head office................. 91 Figure 35: Likert scale on supply chains in general having been more than marginally impacted by climate risk events over the past 3 years ..................................................................... 94 Figure 36: Has your organization's supply chain been more than marginally impacted by a climate risk event over the past 3 years?.............................................................................. 94 Figure 37: Climate risk events that more than marginally impacted supply chains.................................................................... 95 Figure 38: Perceived impact of the climate risk event............................. 96 Figure 39: Impact of the climate risk event related to the company's risk appetite ..................................................................... 97 Figure 40: Preferred climate risk impact indicators................................. 98 Figure 41: Perceived likelihood of future climate risk events impacting respondents' supply chains over the coming three years ...... 100 Figure 42: Preferred climate risk prediction indicators .......................... 102 Figure 43: Perceived impact of the top 3 climate risk events ................. 103 Figure 44: Impact of climate risk events related to the company's risk appetite ......................................................................... 104 Figure 45: Differences in flooding likelihood perception ........................ 105 Figure 46: Differences in hurricane / cyclone / typhoon likelihood perception ...................................................................... 105 Figure 47: Types of risk treatment options used.................................. 106 Figure 48: Types of risk treatment options used when flood impacted .... 107 Figure 49: Types of risk treatment options used when hit by a hurricane........................................................................ 107 Figure 50: Perceived level of influence on risk management decision- making .......................................................................... 108 Figure 51: Western Digital factory inundated by flood waters ................ 159 Page ix List of Tables Table 1: Basic steps of the risk management process............................. 19 Table 2: Operational levels, risk sources events and consequences .......... 27 Table 3: SMART indicator properties .................................................... 39 Table 4: Knowledge levels and risk consequence certainty...................... 43 Table 5: Tomlin vs. Weinhofer and Bush on supply chain risk response strategies ......................................................................... 44 Table 6: Main research paradigms ....................................................... 49 Table 7: Relationship between research objectives and questions ............ 71 Table 8: Indicators for climate risk consequences .................................. 77 Table 9: Climate risk indicators ........................................................... 80 Table 10: Application of a risk management system............................... 92 Table 11: Adherence to a risk management standard............................. 92 Table 12: Application of a supply chain risk management system............ 93 List of Appendices ANNEX 1: Members of the research expert panel ................................. 157 ANNEX 2: The July-November 2011 Thailand floods and disruptions in the global hard disk supply chain......................................................... 159 ANNEX 3: Interview introduction and consent ..................................... 161 ANNEX 4: Interview protocol............................................................. 162 ANNEX 5: Interview transcripts ......................................................... 164 ANNEX 6: Internet-mediated questionnaire introduction....................... 226 ANNEX 7: Interview-mediated questionnaire....................................... 228 Page x List of Abbreviations 3BL Triple bottom line 4T Tolerate, treat, transfer and terminate ACRM Adaptive collaborative risk management ADB Asian Development Bank ALARP As low as reasonably practicable ANAO Australian National Audit Office APEA Asia Pacific Evaluation Association B2B Business to business CDS Center for Decision Sciences CEO Chief executive officer CO 2 Carbon Dioxide COSO Committee of Sponsoring Organizations of the Treadway Commission CSCMP Council of Supply Chain Management Professionals CSIRO Commonwealth Scientific and Industrial Research Organisation CSR Corporate social responsibility DSE Department of Sustainability and Environment EC European Commission EPPI Evidence for Policy and Practice Information and Co- ordinating Centre ERM Enterprise risk management GAMAB Globalement au moins aussi bon GHG Greenhouse gases GIZ Deutsche Gesellschaft fr Technische Zusammenarbeit HSE Health and Safety Executive IDEAS International Development Evaluation Association IEEE Institute of Electrical and Electronics Engineers Page xi IEEM Industrial Engineering and Engineering Management IOCE Organization for Cooperation in Evaluation IOR Institute of Operational Risks IPCC Intergovernmental Panel on Climate Change IRM Institute of Risk Management ISIC International Standard Industrial Classification codes ISO International Standards Organization IUCN International Union for Conservation of Nature JIT Just-in-time KCI Key control indicator KPI Key (risk) performance indicator KRI Key risk indicator LBA Logistics Bureau Asia LLA Logistics Learning Alliance Ltd MECE Mutually exclusive and collectively exhaustive MEM Minimum endogenous mortality MIT Massachusetts Institute of Technology NASA National Aeronautics and Space Administration ND-GAIN Notre Dame University Global Adaptation Index NFPA National Fire Protection Association ODI Overseas Development Institute OECD Organisation for Economic Co-operation and Development PWC Pricewaterhouse Coopers QDA Qualitative data analysis R&D Research and development RO Research objective SCC Supply Chain Council SCOR Supply Chain Operations Reference model SCRLC Supply Chain Risk Leadership Council Page xii SCRM Supply chain risk management SCRMP Supply chain risk management process SMART Specific, measurable, attainable and action-oriented, relevant, and time-bound SME Small and medium-sized enterprises TQM Total quality management UNCED United Nations Conference on Environment and Development UNDESA United Nations Department of Economic and Social Affairs UNEP United Nations Environment Programme UNFCCC United Nations Framework Convention on Climate Change UNGA United Nations General Assembly UNWCED United Nations World Commission on Environment and Development UPS United Parcel Service USD United States Dollar WEF World Economic Forum WMO World Meteorological Organization Page 1 INTRODUCTION Part of what you need to do in the supply chain is to help your company anticipate events, and understand the environment you operate in around the globe. Frances Townsend, speaker at CSCMP 2008. 2 3 I.1 Background to the Research The 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 19 th century when Swedish scientist Svante Arrhenius first calculated the effect of atmospheric CO 2 on global warming and cooling. Given the low rate of CO 2 production in 1896, Arrhenius estimated that global warming due to human CO 2 emissions would take thousands of years. 4 Through the work of the Intergovernmental Panel on Climate Change (IPCC) 5 we now know better. The IPCC was established by the United Nations Environment Programme (UNEP) and the World Meteorological Organization (WMO) in 1988 to provide the world with a clear scientific view on the current state of knowledge in climate change and its potential environmental and socio-economic impacts. 6 The work of the IPCC has driven the development of an extensive research base on the concepts of climate change adaptation, adaptive capacity, resilience and vulnerability to climate change in the context of human communities and systems. 7 2 CSCMP is the Council of Supply Chain Management Professionals annual global conference. 3 Frances M. Fragos Townsend is the former Homeland Security Advisor to United States President George W. Bush and member of the New York policy study group Council on Foreign Relations. 4 Weart 2008. 5 IPCC 1990a, 1990b, 1995a, 1995b, 2001a, 2001b, 2007a, 2007b, 2012, 2013 and 2014. 6 UNGA 1988. 7 Kelly and Adger 2000; OBrien et al. 2004; Smit and Wandel 2006; Hahn and Frode 2010; Vijayavenkataraman, Iniyan and Goic 2012. Page 2 It has provided the scientific foundation for negotiating the United Nations Framework Convention on Climate Change (UNFCCC) 8 , which has the ultimate objective to stabilize greenhouse gas concentrations at a level that would prevent dangerous anthropogenic (human induced) interference with the climate system. 9 The work of the IPCC has also inspired research that focuses on climate change, adaptation, resilience and vulnerability towards and within specific economic / industrial sectors, technologies or cross-sectoral areas of human systems, for example energy 10 , transport and infrastructure 11 , urban environments 12 or banking and the insurance industry 13 . 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 affairs 14 , 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 profits 15 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 future 16 , introducing the concept of sustainable development. 8 The UNFCCC is an international environmental treaty negotiated at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held in Rio de Janeiro from 3 to 14 June 1992. 9 UN 1992, Article 2, p. 4. 10 Connor, Michaeklow and Willianson 2009. 11 Dasgupta et al 2009; Love, Soares and Pempel 2010. 12 Hunt and Watkiss 2011. 13 Lubber 2012; Seifert and Lindberg 2012. 14 See footnote 5. 15 Friedman 1970. 16 UNWCED 1987. Page 3 Nevertheless, sustainability and social responsibility were still seen as part of corporate philanthropy / corporate social responsibility (CSR) with little to no relevance to core corporate strategies. Only over the past decade, aided by reports like the Stern review report on the economics of climate change 17 , 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 Elkington 19 , 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 publications 20 shows that from mid-2000 onwards sustainability has steadily moved to the heart of the corporate strategy. While corporate sustainability at times focuses more on business continuity planning or future proofing than on the 3BL concept, corporations do start to realize that it is critical to maintaining an organizations social license to operate. 21 Sustainability thinking, both from 17 Stern 2006. 18 Lowitt 2009; Halldrsson and Kovcs 2010; KPMG International 2011; PWC 2011. 19 Elkington 1997 and 2004; Carter and Rogers 2008. 20 Markley and Davis 2007; Smith 2007; Moore and Wen 2008; Feldman 2009; McDermott 2009; Ramirez and Hachiya 2009; Vaccaro 2009; Nejati, Shahbudin and Amran 2010; Ciu and Jiao 2011; Henderson 2011; Bouglet, Joffre and Simon 2012; Murthy 2012; 21 Pojasek and Hollist 2011, p. 83. Page 4 a 3BL as well as the business continuity sustainability perspective, gained momentum with the coming into force of the Kyoto Protocol in 2005, an international agreement to limit green house gas (GHG) emissions adopted in 1997. 22 Figure 1: The triple bottom line concept 23 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 Group 25 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. Environmental performance Social performance Sustainability Economic performance Page 5 Climate Change, Sustainability and Supply Chain Management Organizations more and more look at the inter-relationship between their supply chain and climate change or environmental factors 26 , 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 Pinkse 30 look at organizational climate change supply chain strategies in relation to GHG emissions and related risks, while Lash and Wellington 31 look at carbon-related risks and opportunities. Halldrsson and Kovcs 32 discuss the development of an energy agenda, opposed to a sustainability agenda, with the need to rethink supply chain management on both the operational as well as the conceptual level. These researchers focus on greening the supply chain, which concentrates on sustainability aspects and does not necessarily take into account vulnerability and resilience towards physical climate change and environmental factors. This research focuses on the physical element of climate change and extreme weather events - not the legislative element or direct economic effects but the economic impact of such occurrences should be seen as a driver and factor in support of climate risk research. 26 Halldrsson and Kovcs, 2010; Jira and Toffel 2012. 27 Mahler 2007; Lowitt 2009. 28 Sadgrove 1996; Lippmann 1999; Hall 2000. 29 Jones and Levy 2007; Lash and Wellington 2007; McKinsey 2007; Jun et al. 2010; Bapna 2012; Jira and Toffel 2012. 30 Kolk and Pinske 2004. 31 Lash and Wellington 2007. 32 Halldrsson and Kovcs 2010. Page 6 Though cross-border collaboration within supply chains is not new 33 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 Problem What 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 knows more 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 et al. 2011; Jira and Toffel 2012; Meena, Sarmah and Sarkar 2011; Linnenluecke, Griffiths and Winn 2012; Machowiak 2012; Weinhofer and Busch 2012. 37 Sheffi 2005b, p. 18. 38 See footnote 36. 39 Cranfield University 2003a; Christopher and Peck 2004; Rao and Goldsby 2009; Halldrson and Kovcs 2010; Turner 2011; Winn et al. 2011; Linnenluecke, Griffiths and Winn 2012. Page 7 The high levels of uncertainty of consequences or impact and occurrence of climate change and extreme weather events make it hard for managers to guide their organization to take appropriate action. 40 The problem statement translates into the following management questions: 1. To what extent have climate change and extreme weather events impacted companies supply chains? 2. Are physical climate change and weather-related risk indicators (hereafter called climate risk indicators) taken into account into companies Supply Chain Risk Management Processes (SCRMP)? 3. Do these climate risk indicators aid management decision-making to improve supply chain resilience? I.3 Research Questions The 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 guidelines 41 on formulating research questions and objectives. 1. To what extent have physical climate change and extreme weather events impacted supply chains? 2. To what extent are climate risk indicators taken into account in companies Supply Chain Risk Management Processes (SCRMP)? 2 a. What are the climate risk indicators used in companies SCRMP? 2 b. What are the risk categories in which these indicators are used in companies SCRMP? 2 c. What is the risk ranking given to these risk indicators used? 3. How do climate risk indicators, risk categories and risk ranking inform management decision-making to improve supply chain resilience? 40 Peterson 2006; Winn et al. 2010; Linnenluecke, Griffiths and Winn 2012. 41 Creswell 2012; Rojon and Saunders 2012; Saunders, Lewis and Thornhill 2012; Miles, Huberman and Saldaa 2013. Page 8 I.4 Objectives of the Study The 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 marginally impacted 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 climate risk events on the supply chains impacted RO3. To identify the climate risks, risk indicators and related risk categories 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 the SCRMP, and RO6. To describe how this can inform management decision-making to improve supply chain resilience. I.5 Research Rationale This 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 completely be made climate proof. This is not practically possible and as such the term is technically a misnomer. It would be more accurate to talk about enhancing / improving the climate resilience, but in laymans terms this is often replaced with the notion of climate proofing. Page 9 Senior management in companies whose supply chains will likely be impacted by future climate risk events can use the research outcomes to inform their SCRM and related decision making towards supply chain resilience. This research stems from the authors professional experience in the climate change and supply chain disciplines, and his professional interest in the possible consequences created by the potential rise in extreme weather events both in number and force - on supply chain operations. I.6 Limitations The limited timeframe in which the research took place affected research design choices. 43 Due to the largely qualitative nature of expert panel interview data 44 and the snowballed self-selection approach chosen for applying the internet-mediated questionnaire 45 only moderatum generalizations 46 based on contextual transferability 47 of results towards real world contexts are possible, further explained in Paragraph 2.7. To increase accuracy and to triangulate results an iterative mixed-method research design, further explained in Chapter 2, was chosen to collect qualitative and quantitative data concurrently in order to counter-balance weaknesses of one kind of data by strengths of the other kind. 48 Choices made towards this research studys boundaries are as follows: - The exact reasons behind current climatic changes developing, possibly being a mix of anthropogenic (man-made) and biotic or natural impacts, will not be explored as part of this research study - This research focuses on the physical element of climate change and (extreme) weather events, not on the legislative elements, social elements or direct economic effects - Earthquakes and volcanoes, being natural catastrophes, are not taken into account in this research study given the research base on the linkages between climate change and the occurrence of earthquakes and volcanoes is still in its infancy 43 See Chapter 2 Research Methodology. 44 See Paragraph 2.3 Expert Panel Interviews. 45 See Paragraph 2.4 Internet-Mediated Questionnaire. 46 Schutz 1982; Williams 2002. 47 Halldrsson and Aastrup 2003, p. 327; Saunders, Lewis and Thornhill 2012, p. 194. 48 Nslund 2002; Mangan, Lalwani and Gardner 2004; Kovcs and Spens 2005; Harrison and Reiley 2011; Sanders and Wagner 2011; Golicic and Davis 2012. Page 10 - The focus of this research study is on the negative impacts of climate risk events not on potential positive consequences - The negative consequences of climate risk sources and events on supply chains lay at the heart of this research, not their impact on the broader concept of value chain, which would include product design, marketing, after-sales, re-use, etc. - The aim of this research study is not to develop climate risk indicators, but to identify climate risk indicators and related risk categories being used in companies Supply Chain Risk Management Process (SCRMP). - This research departs from and builds upon risk management standard 31000 of the International Organization for Standardization (ISO), 49 being the most widely used and accepted risk management standard - Given the researchs focus on climate risk sources and taking into account the limited research timeframe, the focus will be on the risk assessment phase. Do note that the Harvard referencing system has been used to reference all literature throughout this research report, but to improve overall readability the referencing has been done in the footnotes and not the main text. I.7 Outline of the Report This research report is divided into an introduction, glossary and five chapters. The Introduction provides the background and foundation for the reader, and sets the research objectives. Technical terms used are defined in the Glossary, which is placed after the Introduction because terms defined are being used throughout the report and form the definitional groundwork of subsequent chapters. The first chapter provides an in-depth review of relevant supply chain risk management literature. Chapter 2 explains the choices made towards the research design and the methodology adopted. Data analysis and results can be found in Chapter 3, while a reflection on these results is presented in Chapter 4. Conclusions and recommendations are provided in the final chapter, Chapter 5, looking back at the problem statement and objectives formulated in this introduction. 49 ISO 2009a and 2009b. Page 11 GLOSSARY With the research aim focusing on climate risk sources in supply chain risk management, this research brings together two fields of knowledge with each their specific technical terms and definitions. Given the importance and relevance of the explanations of concepts as forming the definitional groundwork for this research study and their use throughout the following chapters of this research report, the choice was made to introduce these concepts here. Climate change related technical terms and definitions are presented in the first paragraph, with Paragraph G.2 focusing on terms and definitions specific to risk management. G.1 Climate Change Technical Terms and Definitions The definitions have been adapted from the sources representing the most widely used definitions, being the IPCC Fourth Assessment Report 50 and the Dictionary of Geological Terms 51 , unless stated otherwise in a footnote. Adaptation Adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm, increases resilience or exploits beneficial opportunities. Adaptive capacity The ability of a system to adjust to climate change (including climate variability and extremes) to moderate potential damages, to take advantage of opportunities, or to cope with the consequences. Climate change Climate change refers to a change in the state of the - climate that can be identified by changes in the mean and/or the variability of its properties, and that persists for an extended period, typically decades or longer. Climate change may be due to natural internal processes or external forcings, or to persistent human-induced changes in the composition of the atmosphere or in land use. 50 IPCC 2007a and 2007b. 51 Bates and Jackson eds. 1984. Page 12 Climate proofing In this research study climate proofing is defined as improving or enhancing supply chain resilience towards climate risk events, which are those risk events originating from physical climate change and weather-related risk sources, to be called climate risk sources. 52 Environment Environment is used and defined in this research as the natural environment, encompassing all living and non-living things occurring naturally on Earth or some region thereof, and their interaction. 53 The concept of environment will be used interchangeably with the concept of ecosystem. Impacts The effects of climate change on natural and human systems. Depending on the consideration of adaptation, one can distinguish between potential impacts and residual impacts; Potential impacts, being all impacts that may occur given a projected change in climate, without considering adaptation. Residual impacts, being the impacts of climate change that would occur after adaptation. Mitigation A human intervention through technological change and substitution that reduces resource inputs and emissions per unit of output. Although several social, economic and technological policies would produce an emission reduction, with respect to climate change, mitigation means implementing policies to reduce GHG emissions and enhance GHG sinks. Potential In the context of climate change, potential is the amount of mitigation or adaptation that could be - but is not yet - realized over time. Resilience The ability of a system to absorb disturbances while retaining the same basic structure and ways of functioning, the capacity for self- organization, and the capacity to adapt to stress and change. Sensitivity Sensitivity is the degree to which a system is affected, either adversely or beneficially, by climate variability or change. The effect may be direct (e.g., a change in crop yield in response to a change in the mean, range or variability of temperature) or indirect (e.g., damages caused by an increase in the frequency of coastal flooding due to sea-level rise). 52 Defined by the author. 53 Johnson et al. 1997. Page 13 Sustainability Sustainability is improving the quality of human life while living within the carrying capacity of supporting ecosystems. 54 Sustainable development Development that meets the cultural, social, political and economic needs of the present generation without compromising the ability of future generations to meet their own needs. Vulnerability Vulnerability is the degree to which a system is susceptible to, and unable to cope with, adverse consequences of climate change, including climate variability and extremes. Vulnerability is a function of the character, magnitude, and rate of climate change and variation to which a system is exposed, its sensitivity, and its adaptive capacity. G.2 Risk Management Technical Terms and Definitions Risk management technical terms and definitions follow the ISO 31000 Risk Management Principles and Guidelines and ISO Guide 73 Risk Management Vocabulary 55 , unless stated differently in the footnote. The literature review in the subsequent chapter further elaborates on risk management, supply chain risk management, and the risk assessment process adopted for use in this research study. Exposure Exposure is the extent to which an organization is subject to a risk event. Risk Risk is the effect of uncertainty on (business) objectives. The effect may be positive, negative or a deviation from the expected and risk is often described by an event, a change in circumstances or a consequence. Given the managerial scope of this research the focus will be on negative effects of uncertainty on objectives, most accurately reflecting business reality. Risk acceptance levels Risk acceptance levels are the level of risk to which one makes an informed decision to take a particular risk. Risk acceptance can occur without risk treatment. The ISO31000 standard states that generally established risk acceptance principles should be used. The ALARP (as low as reasonably practicable) principle will be used to link risk 54 Barrow 1994. 55 See footnote 49. Page 14 acceptance levels to decision making, in a three level context where low risks are called accepted and high risks are intolerable and have to be reduced, with in between these zones a region of tolerability. 56 The resulting acceptance levels are acceptable, tolerable and unacceptable. Risk analysis Risk analysis is the process to comprehend the nature of risk and to determine the level of risk. The main elements of risk analysis are risk levels, risk likelihood and risk consequence. Risk assessment Risk assessment is the overall process of risk identification, risk analysis and risk evaluation. Risk categories Risk categories are sometimes referred to as risk dimensions 57 or risk elements 58 . 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 Tang 2012. 60 ISO 2009a and 2009b; Tummala and Schoenherr 2011. Page 15 Risk event Risk event is an occurrence or change of a particular set of circumstances having the potential to give rise to risk, for example the transformation of a hazard into a risk source giving ultimately rise to risk. Climate risk events are those risk events originating from physical climate change and weather-related risk sources, to be called climate risk sources. Risk identification Risk identification is the process of finding, recognizing and describing risks. It involves the identification of climate risk sources and events. Research Objective 1 (RO1) focuses on finding, recognizing and describing risks, while Research Objective 3 (RO3) targets the identification of climate risk indicators used in companies SCRMP. Risk indicators Risk indicators are metrics used to monitor identified risk exposures over time, therefore any piece of data that can perform this function may be considered a risk indicator. 61 Indicators may represent key ratios tracked as indicators of evolving risks, or they may be more elaborate and involve the aggregation of several individual risk indicators into a multi- dimensional score about emerging events that may lead to new risks. 62 Climate risk indicators are those risk indicators that link directly to physical climate change and weather-related risk exposures. Risk levels - The level of risk is the magnitude of a risk or a combination of risks, 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 often 63 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 reports 66 range of the likelihood of 61 IOR 2010. 62 Beasley, Branson and Hancock 2010. 63 Tummala and Schoenherr 2011. 64 Weinstein and Diefenbach 1997. 65 Klemens 2009. 66 See footnote 50. Page 16 occurrence of an uncertain risk event is used throughout this report, being: >99% Virtually certain; >90% Very likely; >66% Likely; 33 to 66% About as likely as not; <33% Unlikely; <10% Very unlikely; <1% Exceptionally unlikely. Risk likelihood is part of Research Objective 4 (RO4). Risk ranking - Risk ranking is based on the determination of risk levels for each identified supply chain risk. Risk ranking is part of Research Objective 4 (RO4). Risk source A risk source is an element which alone or in combination has the intrinsic potential to give rise to risk. Climate risk sources are those that are directly linked to physical climate change and weather- related sources of risk. Page 17 CHAPTER 1 LITERATURE REVIEW A stepped literature review approach, further described in Paragraph 2.2, was used to critically review the existing body of knowledge relevant to this research and needed to frame and ground the research within the existing supply chain climate risk management enigma. The review started with an initial literature orientation and exploratory review focusing on the climate change and environmental context in relation to corporate processes and supply chains, shaping the background to the research and aiding in the formulation of the research problem. 1.1 Introduction This 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 Management It was Chevalier de Mr in 1717, professional knight and gambler, who instigated the development of the first scientific approach to risk management. He asked famous mathematician Blaise Pascal to calculate his unexpected losses in a game of rolling the dice. Pascal collaborated with amateur mathematician Pierre de Fermat and the two laid out the foundation for the theory of probability, hence the first steps were set in risk management. 67 67 Falk 1997. Page 18 A seminal piece of work in the management discipline dealing directly with risk management was by Markowitz 68 who described risks and rewards of financial investments. Early risk management and analysis research can be divided into two distinct groupings. The first category focuses mainly on statistical inference and categorization of technological risks and the risks of human activities with a focus on risk perception and/or business processes, and the use of mathematical and statistical procedures to analyze and evaluate risks. 69 The second body of research - with researchers like Robert W. Kates and Gilbert F. White - focuses on natural hazards from an environmental and natural resource management perspective, often using processes and procedures originating from social research and social evaluation practices. 70 Bowonder makes a link between the two groups by focusing on environmental risks and early warning systems in developing countries, while Sherif looks at environmental considerations to strengthen technological risk management. 71 But a first attempt to link natural hazards, risk management and (business) decision-making is perhaps by Robert W. Kates research (1978) on risk assessment of environmental hazards. Though he defines environmental hazard as the threat potential posed to man or nature by events originating in or transmitted by the natural or built environment (p. 12), which is a wider definition of the environment than the one used for this research. His research case studies mainly explore environmental hazards originating in the built environment, like stratospheric pollution and ozone, mercury pollution in agriculture and risks related to nuclear reactors. Though his conclusion can be seen as a precursor of the present-day climate change discussion: We need, in short, some global abominations some avoidances, some risks to be averted not because it is impossible to cope successfully with any of these potential [environmental] hazards, but because it may be impossible to cope successfully with all of them Robert W. Kates 1978 p. 100. 68 Markowitz 1952. 69 Markowitz 1952; Starr 1969; Otway and Pahner 1976; Rowe 1980; Fischhoff et al. 1981; Covello 1983; Covello and Mumpower 1985; Slovic 1987; Greenwald and Stiglitz 1990; Sherif 1991. 70 Burton and Kates 1964; White 1974; White and Haas 1975; Burton, Kates and White 1978; Kates 1978; Bowonder 1981; Baird 1986; Sherif 1990. 71 Bowonder 1981; Sherif 1990. Page 19 Risk management research in general 72 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 processes 73 , 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 process 74 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; Baird 1986; Slovic 1987; Greenwald and Stiglitz 1990; Sherif 1990 and 1991; Fischhoff 1995; Kleindorfer and Kunreuther 1999a and 1999b; Mitchell 1999; HSE 2001; Slovic and Weber 2002; Slovic and Peters 2006; Wagner and Bode 2006 and 2008; Aven 2009; ISO 2009a; Rao and Goldsby 2009; Beasley, Branson and Hancock 2010; IOR 2010; IRM 2010; Tang and Musa 2011. 73 McCormack et al. 2008; ISO 2009a and 2009b; Pujawan and Geraldin 2009; Kouvelis et al. 2012. 74 As identified by the author, based on the resources in footnote 72. 75 ISO 2009a and 2009b; IRM 2010; May and Plummer 2011; SCRLC 2011; Tummala and Schoenherr 2011; Jereb, Cvahte and Rosi 2012; Dallas 2013. Page 20 culture, individual vs. group decision-making behaviour, level of knowledge and media coverage of risks - rather than differences in attitude towards (perceived) risks. 76 Figure 2: The ISO 31000 risk management process 77 1.3 Supply Chain Risk Management With the term supply chain management only being coined on June 4 1982 by Keith Oliver in a Financial Times interview with Arnold Kransdorff 78 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 and Peters 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 C o m m u n i c a t i o n
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r e v i e w i n g Page 21 Supply Chain Risk Management (SCRM) has received increasing attention over the past decade, given that cross-border collaboration within supply chains through outsourcing and off-shoring has intensified over the past decades resulting in longer, more complex supply chains. The growing complexity of modern supply chains is attributable to a drive for cost reduction to make supply chains as efficient as possible in moving a product or service through a process of activities towards customers to satisfy their demands; resulting in high levels of customer satisfaction at low cost. The unpredictability of the business environment and economic downturn, continuous improvement initiatives / process improvement strategies like just-in-time (JIT) management, total quality management (TQM), six sigma and lean manufacturing, strategies to reduce supplier base and an increase in extreme weather events have made supply chains more vulnerable to climate risk events. 80 What makes supply chains leaner and more responsive in a stable environment also increases their vulnerability to low- probability/high-impact risk events. Supply chains are not only vulnerable to disruptions in their network, infrastructure and assets within nodes and links, but due to high levels of inter-connectedness and inter-dependencies they are increasingly vulnerable to disruptions on the side of their suppliers, customers, transport providers, communication lines and other elements in the wider supply chain environment. 81 An overview of some of the elements mentioned as ameliorating supply chain vulnerability towards climate risk events is given in Figure 3 on the next page. The focus of this research will be on introducing climate risk sources, events and indicators into Supply Chain Risk Management (SCRM) with a main focus on the risk assessment phase. Climate risks need to be understood to initiate their efficient management through the development of risk response and control plans in order to improve supply chain resilience towards climate risk events - including extreme weather - to be called climate proofing. 80 See footnote 36. 81 Cranfield University 2003a and 2003b; Sheffi 2005a and 2005b; Sheffi and Rice 2005; Enyinda, Ogbuehi and Briggs 2008; Meena, Sarmah and Sarkar 2011; WEF 2012; Wright and Datskovska 2012. Page 22 Figure 3: Supply chain trends and climate risk According to ISO 31000 Risk Management Principles and Guidelines 82 , 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 Rogers 83 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. Outsourcing and off-shoring Longer supply lines, increase in nodes Complex communication networks Increase in product complexity Increase in extreme weather events Continuous improvement initiatives Less inventories, buffer stock reduction Increase in single sourcing Increased supply chain vulnerability towards climate risk sources and events Extensive sub-contracting Geographical areas of production specialization Page 23 Hazards, risks and potential consequence Before continuing to discuss the supply chain risk management process, it is good to take a step back and get a clear view of technical terms as defined in the Glossary and their possible interaction. One term used next to risk is the term hazard. Hazards are potential sources of harm or danger. 85 Hazards can develop into risk sources, which can be used as risk indicators or as part of a multidimensional risk indicator score. While not every hazard will result in a risk source developing into a risk event and giving rise to supply chain risk, every risk event originates from a hazardous condition. Vulnerability is the degree to which a system is unable to cope with certain risks, and a function of the character, magnitude, and rate of a risk event to which a system is exposed, its sensitivity, and its adaptive capacity. Sensitivity and adaptive capacity are both elements of the system being exposed, the first being the degree to which a system is affected and the latter the ability of a system to adjust to a risk event, moderate potential damages or cope with the consequences. 86 The potential risk consequence or impact is a function of both the vulnerability and the level of risk exposure. The essence of most disruptions is a reduction in capacity and therefore an inability to meet demand 87 , which often translates into time delays and economic losses. Where sensitivity focuses on the degree of the system being affected, risk exposure focuses on the degree to which a system is being exposed to a risk, irrespective of its sensitivity. But what is seen as an acceptable risk to one company might not be acceptable to another. The risk acceptance level is the level of risk to which one makes an informed decision to take a particular risk, and/or the moment where decisions towards active crisis management or contingency planning are made. 85 ISO 2009a, p. 6; Kouvelis et al. 2012. 86 See footnote 50. 87 Sheffi 2005b, p. 14. Hazard Risk source Risk Event Risk Page 24 Figure 4 provides a visual representation of the relationships discussed. 88 The risk level in the end is the magnitude of a risk expressed in terms of the product of the likelihood of occurrence of a certain (future) risk event and the likely consequences or impact the event is expected to bring about, informed by the companys risk acceptance level. This is often represented in a heat map 89 , risk map 90 or risk matrix 91 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. Risk exposure Sensitivity Potential risk consequence / impact Climate risk level Adaptive capacity Vulnerability Risk Likelihood Climate hazard risk source risk event Risk acceptance level (risk appetite) Page 25 Figure 5: Example of a risk matrix with risk levels Figure 6: Risk matrix, including type of action in case of a risk event 92 92 Kouvelis et al. 2012, p. 9, fig. 1.2. Risk likelihood Very unlikely Unlikely Very likely Likely Moderately likely C r i t i c a l S e v e r e M o d e r a t e M i n o r N e g l i g i b l e R i s k
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i m p a c t = Do nothing = Crisis management = Contingency planning = Buffering / pooling Page 26 Origin of risk sources and operational levels The discussion in Paragraph 1.2 on research groupings in early risk management 93 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 Council 96 - 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 Shankar 2006a; Tang 2006; Gaudenzi and Borghezi 2006; Oke and Gopalakrishnan 2009; Trkman and McCormack 2009; Olson 2011; Kern et al. 2012. 99 Harland, Brenchley and Walker 2000; Chopra and Sodhi 2004; Spekman and Davies 2004; ISO 2007; Ritchie and Brindley 2007; Tang and Tomlin 2008; Tang and Numaya 2011; Tummula and Schoenherr 2011; Cagliano et al. 2012; Vilko and Hallikas 2012. 100 Wagner and Bode 2006; Reese 2007; Skelton 2007; Bessant 2008; Wagner and Bode 2008; Rao and Goldsby 2009. 101 Franck 2007; Muzumdar 2011. Page 27 What becomes clear is that, whichever perspective is taken, supply chains cover, are embedded in and influenced by risk events originating from and coming into existence on various operational levels, eventually impacting the supply chain on process level. The overview of operational levels and their interdependency presented in Table 2 is based on Cranfield Universitys publications and teachings on SCRM: 102 103 Level 1 Process / value stream The supply chain is seen as a pipeline or value stream at process level running through and between networked organizations. Supply chain risks originating at this level are often linked to financial or commercial risks due to poor supply chain performance, demand volatility and shifting marketplace requirements. Level 2 Assets and Infrastructure Dependencies One level higher are the communications, transport and distribution infrastructures connecting fixed sites and facilities, i.e. linking the nodes. Assets are the assets of these sites and facilities as well as assets used in the various infrastructures connecting the nodes. Risks originating at this level relate to the inter-organizational communication, transport and distribution infrastructures and the failure of related assets. Level 3 Organisations and Inter-organisational Networks Supply chains are viewed as inter-organizational networks, in which organizations have their specific business strategies and micro-economics. Power dependencies, trading relationships, business and sourcing strategies are among this levels main risk sources. Level 4 The wider environment The final level is the macro-economic and natural environment, in which business takes place, assets and infrastructure are located and supply chains flow. Sources of risk are beyond the control of one company or even an inter-organizational network. Table 2: Operational levels, risk sources events and consequences 102 Cranfield University 2003a and 2003b. 103 Cranfields operational levels are comparable to Olsons (2011, page 44, Table 4.1) value hierarchy of supply chain risks. It is not clear whether he analyzes identified risks in isolation from one another or takes into account amalgamation of risk sources and/or knock-on effects of risk consequences. Page 28 Operational level 4 is where a combination of multi-level risk sources will translate into climate risk events impacting lower organizational levels, impacting the supply chain either directly or through knock-on effects, as presented in Figure 7 below. While climate risk sources can develop into risk events on their own, they often dont take place in isolation and frequently are a compounding, contributing factor or risk trigger adding to existing or evolving lower-level risk sources. Climate risk events can result in direct climate risk consequences or indirect consequences through the exacerbation of existing organizational, infrastructural and supply chain level vulnerabilities. An example is presented in Annex 2 in which the July-November 2011 Thailand floods and their risk consequences for the global production and supply of computer hard disks is discussed, touching upon the use of technical terms in risk management, the operational levels and the origins of risk sources. Figure 7: Operational levels, risk origin and level of control 104 104 See footnote 102. Level of control High level of control Low level of control E x t e r n a l I n t e r n a l R i s k
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o r i g i n Operational level 1 Value chain Supply chain Processes & workflows Operational level 2 Asset and infrastructure interdependencies Operational level 3 Inter-organizational networks; business strategies / micro- economics Operational level 4 The natural environment Macro-economics Risk event Page 29 1.4 Supply Chain Risk Management Process There are various Supply Chain Risk Management Process (SCRMP) models and approaches. Some of these depart from risk management sciences 105 , while others depart from supply chain performance improvement models or operations research 106 . 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 Assessment Risk 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 2009a and 2009b; SCRLC 2011; Tummala and Schoenherr 2011. 106 Sinha, Whitman and Mazahin 2004; Gaudenzi and Borghesi 2006; McCormack et al. 2008; Pujawan and Geraldin 2009; Olson 2011; Olson and Wu 2011; SCC 2011. 107 Harland, Brenchley and Walker 2003; Kleindorfer and Saad 2005; Cucchiella and Gastaldi 2006; ISO 2009a and 2009b; Pujawan and Geraldin 2009; Tummala and Schoenherr 2011; Kern et al. 2012. Page 30 Figure 8: A comprehensive supply chain risk management process model 108 The identification of climate risk categories 109 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 and contingency plans Risk control and monitoring S u p p l y
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r e v i e w i n g Supply chain management decisions = ISO31000 standard (2009a and 2009b) = Tummala and Schoenherr (2011) Page 31 Figure 9: Supply chain risk assessment flowchart 110 1.6 Climate risks and their consequences Despite concluding that leaner and more responsive supply chains in a stable environment are more vulnerable to disruptions once the environment turns unstable 111 , 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 change 112 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 Risk likelihood R i s k
c a t e g o r i e s Risk consequence Risk level Risk evaluation Risk ranking Risk acceptance levels Page 32 Swiss Re reinsurance and consulting company has been publicizing yearly reports on natural catastrophes and man-made disasters and their financial impact 113 . 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 pattern 115 , 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 1970-2012 116 Though not providing a complete picture or one that can be aggregated over longer time periods 117 , 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, Schwarz and Lindemuth 2007; Enz et al. 2008; Enz, Zimmerli and Schwarz 2009; Rogers, Mehlhorn and Schwarz 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 the number of human casualties exceed certain set thresholds. 115 Given the short time frame of 3 years and also a simultaneous decrease in man-made disasters. 116 Bevere et al. 2013, p. 2, fig. 1. 117 Due to the short time frame for which data was available. See footnote 113. Page 33 tectonic plate movement causing earthquakes, and thinning ice sheets may trigger dormant volcanoes, but there is no consensus on these viewpoints in the scientific community. 118 Earthquakes and volcanoes are as such not seen as climate risk events and not taken into account in this research study. Figure 11: Average total economic losses (USD) per natural catastrophe 119 120 121 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 sources 122 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 Iaffaldano, Husson and Bunge 2011; McGuire 2012. 119 Based on data from resources under footnote 113. 120 Note that the data does not provide nor tries to draw any conclusions towards the existence and/or direction of a cause-effect relation between the occurrence and magnitude of risk events and their financial consequences, given this also depends on risk exposure, sensitivity and vulnerability. An increase in average total economic losses can be due to an increase in occurrence and magnitude of events, but it might be equally true that our exposure and vulnerability towards such events has increased due to population growth, industrial growth, local contextual changes, etc. 121 A simple linear regression was added to show the upward nature of the data. 122 The publication uses the term risk triggers instead of risk sources. WEF 2012. $0 $500 $1,000 $1,500 $2,000 $2,500 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 M i l l i o n s Page 34 Figure 12: Risk sources of global supply chain disruptions 123 Munich Re reported that it [2012] was the third-costliest year on record behind 2011 and 2005 124 , for economic damages from weather-related disasters. Companies and their stakeholders governments, employees, communities and customers are increasingly concerned about the costs associated with more frequent and intense floods, droughts, hurricanes and wildfires. 125 123 WEF 2012, p. 8, fig. 2. Note that extreme weather is seen as a subset of natural disasters. 124 Crawford and Seidel 2013, p. ix. 125 Ibid. Environmental Natural disasters 59% Extreme weather 30% Pandemic 11% Geopolitical Conflict and political unrest 46% Export / import restrictions 33% Terrorism 32% Corruption 17% Illicit trade and organized crime 15% Maritime piracy 9% Nuclear / biological / chemical weapons 6% Economic Sudden demand shocks 44% Extreme volatility in commodity prices 30% Border delays 26% Currency ?uctuations 26% Global energy shortages 19% Ownership / investment restrictions 17% Shortage of labour 17% Technological ICT disruptions 30% Transport infrastructure failures 6% Uncontrollable Influencable Controllable Page 35 When combining the risk matrix of Figure 6 with information on the increase of natural catastrophes as presented in Figure 10 and Figure 11, on the increase in occurrence of natural catastrophes as well as their financial impact, then risk levels of climate risk events might very well move to more critical and more likely levels then where they were positioned in earlier risk matrices, as presented in Figure 13 below. Figure 13: Risk matrix, including climate risk events 126 Please note that the above figure presents climate risk events in isolation, while in real-life climate risk events are often a compounding, contributing factors or risk triggers adding to existing or evolving lower-level risk sources. The failure of a logistics provider for example might be due to the providers poorly maintained asset base and dire continuity management, though exacerbated by the impact of a hurricane on that provider. 126 Based on Kouvelis et al. 2012, p. 9, fig. 1.2 and Kouvelis et al. 2012, p. 22, fig. 2.4. Risk likelihood Very unlikely Unlikely Very likely Likely Moderately likely C r i t i c a l S e v e r e M o d e r a t e M i n o r N e g l i g i b l e R i s k
c o n s e q u e n c e
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i m p a c t Terrorism Political instability Economic recession ICT failure Equipment failure Fire Transport delays Uncertain demand Supplier bankruptcy Product quality failure Tornados Earthquake Hurricane Flooding Land, water, atmospheric pollution Logistics provider failure Severe weather damage Stock-outs Loss of key personnel Cargo losses Catastrophic loss of key supplier = Do nothing = Crisis management = Contingency planning = Buffering / pooling Page 36 Climate risk events are still seen as low-probability/high-impact when looking at specific links, nodes or assets in the supply chain, but the likelihood of a climate risk event happening somewhere in the supply chain as a whole is considerably higher. While the likelihood of any one event that would have an impact on any one facility or supplier is small, the collective chance that some part of the supply chain will face some type of disruption is high. 127 Climate risk sources and risk events could as such move out of the area where they result in too little consequences to justify a planned reaction (like severe weather damage in Figure 13), and out of the current sphere of crisis management (like hurricanes, tornados and flooding in Figure 13) into the realm of contingency planning, which will have an impact on where the response is positioned within the organization, and how climate risk management will inform decision making. Crisis management in its wider definition can either refer to managing a risk event after it has arisen as well as managing in a way that limits the changes of risk events arising. 128 In the context of Figure 13 crisis management entails the response after a crisis has occurred. It does include the establishment of a crisis management team, roles, responsibilities, authorities and communication lines, but the brunt of activities take place when a risk event is imminent or already came to fruition and risk consequences are visible. Contingency planning, also called business continuity planning, is looking at the what-if in recognition of the fact that certain climate risk sources can come to fruition and need an adequate response. It refers to planning in the pre-incident phase aimed to prepare plans for those events with the highest risk levels. The first option that managers have is to list risk events that can lead to disruption and prioritize them, while the second option is to list possible risk events and analyze their causes and consequences. The first option focuses on reducing the likelihood of a risk event impacting, which is useful when planning and (re-)designing your supply chain, while the latter is more useful when developing contingency plans. 129 127 Sheffi 2005b, p. 26. 128 Allinson 1993; Farazmand 2001. 129 Sheffi 2005b. Page 37 Contingency or continuity plans generally include the following elements: 1. Leadership succession information 2. Pre-delegation of emergency authorities 3. Emergency action steps, checklists, action lists and operating procedures identifying emergency assignments and responsibilities 4. Primary, alternate and backup emergency operations facilities 5. Vital records management and data procedures 6. Protection of resources, facilities and personnel. 130 1.7 Climate risk indicators Key to making climate risk management operational in the context of supply chains is the examination of past climate risk sources and events, current trends and future climate risk projections 131 in the light of supply chain vulnerabilities. This also indicates a difference between key (risk) performance indicators (KPI) and key risk indicators (KRI), the former focusing on past performance and being lagging indicators, while the latter also incorporates current trends and future projections by means of leading indicators to serve as early warning indicators signalling the need for action to be taken. 132 133 However, current risk management plans often depart from a historical risk picture and do not take into account the increasing intensity and frequency of evolving climate risk events. 134 The IPCC reports 135 provide long term climate risk indicators and predications but their long term vision and regional horizons are often difficult to disaggregate into short-term, context-specific data needed for risk management and business decision- making. Companies struggle with what to assume about the changing risk profile of extreme weather. Some underestimate future risks by simply assuming that past events will be repeated in the future, or use historical trends and factor in a margin of safety (e.g., a 100-year event will become a 50-year event). Others look at climate assessments (e.g., typically 130 ASIS 2005 and 2009; NFPA 2010; Lerbinger 2012. 131 Crawford and Seidel 2013. 132 On key (risk) performance indicators (KPI) vs. key risk indicators (KRI): Immaneni, Mastro and Haubenstock 2005; Beasley, Branson and Hancock 2010; IRM 2010. 133 On lagging vs. leading indicators: Brewer and Pojasek 2013. 134 See footnote 130. 135 See footnote 5 Page 38 scenarios contained in the IPCC assessments), but the scale of these assessments tends to be too large to be useful for companies evaluating individual facilities and they are only undertaken every five to seven years. 136 Apart from climate risk sources, risk sources on all operational levels having the potential to ameliorate climate risk consequences should be taken into account. The other way around is true as well, climate risk sources can also exacerbate or be a trigger towards other risk sources on all operational levels and those that can be triggered by climate risk events should be taken into account as well. When developing an effective set of key risk indicators (KRIs) both climate-related as well as non-climate-related, leading as well as lagging the goal is to identify those metrics that provide useful insights into potential risk sources and events that may impact an organizations objectives and financial bottom line. 137 Some research, referenced by Sheffi, 138 suggests that based on the power law probability distribution one could observe more frequently occurring smaller risk events to assess the odds of a high-impact/low-probability risk event taking place. In the case of indicators measuring the management of a certain risk pre- incident or anticipatory as well as reactive, these are called key control indicators (KCI). Examples are the number of contingency plans updated, the number of contingency plans tested, etc. 139 There are various explanations and definitions on the properties of risk indicators 140 , but most of the properties used can be captured within the SMART criteria 141 Specific, Measurable, Attainable and action-oriented, Relevant, and Time-bound often used in performance management and further explained in Table 3 on the following page. 136 Crawford and Seidel 2013, p. 21. 137 Beasley, Branson and Hancock 2010; IRM 2010. 138 Sheffi 2005b, p.49. 139 IOR 2010. 140 Immaneni, Mastro and Haubenstock 2005; Lam 2005; Shanin and Mahbod 2007; IOR 2010; Crawford and Seidel 2013. 141 Poister 2003; ANAO 2011; Shanin and Mahbod 2007. Page 39 Indicator properties Specific Should be clear and unambiguous in what it is measuring, with a specific purpose and tied to objectives and specific risk / indicator owners Measurable Capable of being quantifiably measured with a high level of certainty and on a repeated, comparable basis, by means of consistent methodologies and standards Attainable Attainable in that it can be measured simply and reasonably cost-effective, and the data should be relatively easy to interpret and understand in support of management decisions and actions Relevant Relevance to what is being monitored, linked to risk acceptance levels and evidence-based risk decision-making. Analytically sound trigger levels exist and these are linked to clear escalation criteria, including risk / indicator owner and contingency planning documentation Time-bound Should be measured on specific moments in time and tell something about a predefined and relevant period. The indicator has sufficient lead to either prevent or inform action in the case of a risk event occurring Table 3: SMART indicator properties 142 Immaneni, Mastro and Haubenstock 143 do present a gap assessment template worth mentioning, based on Six Sigma tools, to score the appropriateness of indicators to serve as key risk indicators. By scoring seven questions an indicator is assessed on its appropriateness, and three of these questions should be added to the SMART criteria in relation to climate risk indicators and operationalizing climate risk sources and events: - Do trigger levels exist and if so, are they analytically sound? - Are there clear escalation criteria tied to the trigger levels? - Is the metric leading or lagging? These questions have been added to the information in Table 3, in italic. 142 Poister 2003; Immaneni, Mastro and Haubenstock 2005; Shanin and Mahbod 2007; ANAO 2011. 143 Immaneni, Mastro and Haubenstock 2005, p. 43, fig. 1. Page 40 As an example; Bayer AG a global conglomerate with core competencies in the fields of health care, agriculture, and high-tech materials uses BayRISK, which is a centralized risk management database. A team of 18 staff members work solely on environmental risks with a focus on extreme weather risk sources, company-internal awareness on how these link to the business, including indicators on risk management and informed decision- making. Research institutes develop weather projections for Bayer locations, informing 10- to 20-year planning horizons. The two main climate risk indicators used are: changes in precipitation extremes and droughts (PR1), and changes in precipitation patterns (PR2). Other indicators focus on financial risks linked to climate risk sources and procedures in place for sustainability performance and risk management. 144 Today there is no one standard approach for conducting a business vulnerability assessment, 145 towards climate risk events, as companies use a wide range of approaches differing both in scope and methodology. They use a multitude of data and tools, including past climate data, experience with recent impact events, and the projections of climate models. This diversity of approaches indicates that efforts are in their early stages of development. 146 The insurance industry has been exploring how to measure operational risks 147 for a while now. 148 Commercial insurance companies base their insurance premiums on data on risk likelihoods and consequences, and how risk events affect exposed assets insured. Munich Re for example has developed climate risk models in which climate change is taken into account in extreme weather events. 149 But such calculations are a firms proprietary information. On the other hand, it is hard to say whether a string of events, for example hurricanes, are a low probability drawing from an unchanged distribution 150 or coming from a shift in distribution due to climate change. Insurance premiums almost double when data on risk event likelihood and 144 Bayer 2012 and 2013; Crawford and Seidel 2013, p.65. 145 Crawford and Seidel 2013, p. 26. 146 Ibid. 147 Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Basel 2001. 148 Ceske, Hernndez and Snchez 2000; Pittock 2010, p. 266; World Bank 2010, pp. 141-168. 149 Seifert and Lindberg 2012, p. 3. 150 World Bank 2010, p. 147. Page 41 consequences are ambiguous as opposed to specific. 151 It is that insurability and a mutual need for quality data that might drive partnerships between insurance companies and companies developing their SCRMP and related indicator sets towards climate risk events. The aim of this research study is not to develop a business vulnerability assessment tool or to develop climate risk indicators, but to identify climate risk indicators and related risk categories to be used in companies Supply Chain Risk Management Process (SCRMP). Nevertheless it should be clear what is being perceived as good climate risk indicators. 1.8 SCRM and Management Decision-Making Going back to the risk management introduction and basic risk management process presented in Paragraph 1.2 it becomes clear that risk management is not necessarily about eliminating risks, but about identifying risk sources, risk events that might occur, their likelihood of occurrence and possible risk consequences, and incorporating that knowledge into the organizations decision-making processes. Crisis management and contingency planning were both mentioned in Paragraph 1.6 as organizational responses towards climate risk events and their consequences, in which the latter looks at the what-if in recognition of the fact that certain climate risk events need an adequate response, planned before a risk event and related consequences materialize. With the focus on management decision-making in Research Objective 6 (RO6) it is assumed that SCRMP results should always instigate pre-incident management decision-making. Even if the conclusion would be to opt for a do nothing strategy or move the treatment of possible risk consequences towards the realm of post-risk event crisis management, then that decision should be taken pre-incident. 151 Ibid., p. 148. Page 42 Management decision-making and uncertainty Decision making may be defined as intentional and reflective choice in response to perceived needs. 152 Deterministic decision-making models look at the decision and its outcome alone, while probabilistic models do not only look at the decision and its outcome but also take into account the amount of risk involved. Very few management decision-making situations are taking place with perfect information, i.e. a situation in which all is known and there is no risk involved. Risk management involves determining the likelihood of risk sources developing, risk events occurring and their possible consequences impacting the organization. This is where probability and likelihood substitute complete knowledge. 153 The possible consequences of climate risk events deal with future risk events and their consequences and are as such subject to uncertainty. The probability of occurrence of continued climatic change is very likely to be virtually certain 154 , what is lacking is a high level of certainty regarding the increasing frequency and intensity of extreme weather events for specific locations in which organizations operate 155 . Weinhofer and Bush come to three levels of knowledge that can be distinguished, based on the level of certainty about the magnitude of climate risk consequences. This is visualized in Table 4 on the following page. Especially those risk consequences not yet fully anticipated are often treated with a sit and wait adaptation strategy. 156 This is especially true for low-likelihood/high-impact climate risk events for which the likelihood is judged as very low and/or the cost of a planned response is deemed too high. 157 However, with the occurrence of climate risk events increasing 158 , more is being known about their potential risk consequences and proactive adaptation strategies and contingency planning should be sought. 152 Kleindorfer, Kunreuther and Schoemaker 1993, p. 3. 153 Miller 1992; Kleindorfer, Kunreuther and Schoemaker 1993; Adams 1995; Golub 1997; Ben-Haim 2001; Taghavifrd, Damghani and Moghaddam 2009. 154 Stern 2006; IPCC 2007a, 2007b, 2012 and 2014. 155 Winn et al. 2011; Linnenluecke, Griffiths and Winn 2012; Weinhofer and Bush 2012. 156 Berkhout, Hertin and Gann 2006; Dovers and Hezri 2010; Berkhout 2012. 157 Sheffi 2005b. 158 See footnote 116. Page 43 Knowledge levels and risk consequence certainty 1. Experienced risk consequence: where there is a level of certainty due to past experiences and quality forecasts of potential consequences. E.g.: energy and cooling water cost will possibly go up in areas where average precipitation goes down, especially if there are other pressures on energy and water consumption in the area. 2. Expected risk consequence: the level of certainty is bounded by the assumptions, scope and reliability of considered assessment models. Scenario analysis in combination with climate forecasts can paint a rough picture of the range of potential climate risk consequences. E.g.: short periods of extreme precipitation can result in transport disruptions due to flooding. Extreme droughts can result in disruptions in energy supply, due to lower energy production and increased energy need due to cooling requirements. 3. Not yet fully anticipated risk consequence: there is limited knowledge on the magnitude of potential risk consequences. The probability of occurrence may be known for continued changes of climate means, but the exposure to the potential negative impacts can only be assessed with limited reliability. Table 4: Knowledge levels and risk consequence certainty 159 Supply chain risk response strategies Researchers who explore supply chain risk management, risk sources and how to cope with risk events from a supply chain processes and linkages perspective mainly look at supply chain risk response strategies that fit the processes and linkages focus. Supply chain risk response strategies might focus on capacity increase, buffering and pooling to create redundancy, 160 direct risk avoidance by contracting out, 161 risk management collaboration, information sharing and closer relationships with key suppliers 162 , and supplier diversification, supplier capacity increase and supply decentralization in order to increase flexibility. 163 159 Based on Weinhofer and Bush 2012, pp. 5-6. 160 Chopra and Sodhi 2004; Giunipero and Eltantawy 2004; Sheffi 2005a. 161 Kleindorfer and Saad 2005; Xia and Chen 2011; Weinhofer and Bush 2012. 162 Giunipero and Eltantawy 2004; Norrman and Jansson 2004; Zsidisin et. al. 2004; Kleindorfer and Saad 2005; Sheffi 2005a; Faisal, Banwet and Shankar 2006a and 2006b; Oke and Gopalakrishnan 2009; Trkman and McCormack 2009; Ghadge, Dani and Kalawski 2012. 163 Chopra and Sodhi 2004; Oke and Gopalakrishnan 2009; Trkman and McCormack 2009. Page 44 Popular risk management literature often talks about the 4Ts of risk response or control, being Tolerate, Treat, Transfer and Terminate. 164 Tomlin as well as Weinhofer and Bush come to three risk response strategies 165 , with some overlap as well as dissimilarities (Table 5). Both papers look at financial risk mitigation and operational risk mitigation and avoidance, whereas there is a difference in Tomlin looking at operational contingency planning and Weinhofer and Bush focusing on risk adaptation measures. One could argue that operational contingency planning is also a form of risk adaptation. Tomlin vs. Weinhofer and Bush risk response strategies Tomlin Weinhofer and Bush Financial mitigation (Transfer) Transferring climate risks financially (Transfer) Operational mitigation (Transfer) Avoiding climate risks through risk mitigation strategies and measures (Transfer / Terminate) Operational contingency (Treat) - - Reducing climate risks through risk adaptation strategies and measures (Treat) Table 5: Tomlin vs. Weinhofer and Bush on supply chain risk response strategies 166 Mitigative risk response strategies focus on limiting risk exposure, whereas adaptive strategies focus on decreasing sensitivity and increasing adaptive capacity. 167 Both in the end aim to reduce or alleviate the possible consequences a risk event has on the supply chain. Risk avoidance is also a form of risk mitigation, though it focuses on limiting risk exposure by not doing certain activities at all or outsourcing those activities and responsibilities. 164 IRM 2010, p. 6. 165 Instead of risk response strategies, they do talk about risk mitigation strategies in the sense of reducing or alleviating the possible consequences of a risk event. Not all strategies necessarily mitigate exposure to the climate risk event. 166 Based on Tomlin 2006; Weinhofer and Bush 2012, pp. 12-13, table 5. 167 Based on the adaptation and mitigation definitions as provided in the Glossary. See footnotes 50 and 51. Page 45 Risk analysis Risk likelihood Risk consequence Risk level Risk evaluation Risk ranking Risk acceptance levels Risk treatment P o s s i b l e
m e a s u r e s Do nothing Crisis management Contingency planning / Business continuity planning Financial risk transfer hedging / mitigation Incl. risk avoidance Incl. risk pooling Operational risk adaptation Operational risk mitigation Based on the 4Ts, the risk response strategies identified in Table 5 and the management decision-making options discussed in Paragraph 1.6, Figure 14 below shows the various risk treatment options available to management and influencing management decision-making. The options to do nothing and to focus on crisis management move decision making post risk event, while all other risk treatment options do require some level of planned decision-making and action before a climate risk event and risk consequences occur. Figure 14: Risk treatment options Financial risk transfer and risk avoidance as part of operational risk mitigation do not necessarily reduce the actual exposure of the supply chain to a climate risk event. These risk treatment actions transfer financial implications and responsibilities towards the insurance company or to a contractor hired to focus on a certain element of work and to take related risk responsibilities. Risk avoidance can also result in no risk transfer if certain activities will not be pursued at all. A last option to mention is risk pooling, which focuses on demand risks. An important part of this strategy is inventory pooling. 168 If inventory pooling 168 Sheffi 2005, pp. 101-103; Oeser 2010. Page 46 would result in inventory centralization then this poses a risk increased supply chain impact when that centralized warehouse would be hit by a climate risk event as much as it is a risk treatment option towards climate risk events. Risk pooling as aggregated risk analysis throughout the supply chain, including all supply chain nodes and linkages, can be seen as adaptive as well as mitigative risk treatment, depending on the resulting action. 1.9 A critical note on (risk) perception This report started with the research objectives and RO2 was written as to identify the perceived extent of negative consequences of climate risk events on the supply chains impacted. In Paragraph 1.2 it was said that differences in risk acceptance have more to do with differences in risk perception rather than differences in attitude towards (perceived) risks. This was followed in Paragraph 1.6 with the conclusion that leaner and more responsive supply chains in a stable environment are more vulnerable to disruptions once the environment turns unstable, but the question remained whether supply chain managers perceive climate risk events as being of growing concern to their operations. Perceived risk may very well differ from objective 169 risk assessments but they are clearly a reflection of real risks, especially when risk sources are known. 170 It is also questionable whether there is such a thing as true objective likelihood 171 when looking at the chances of future climate risk events occurring. Smithson states that if there is any approach to ignorance that bears a creditable claim to generalizability and rationality simultaneously, it is probability. Virtually all modern accounts of uncertainty refer to the concept and theory of probability as a benchmark. 172 Unlike mathematical functions, probability theories have their limitations as predictive risk management tool, 173 especially when predicting the likelihood of future climate risk events occurring. 174 169 Objective risks are those risks that exist independent of an individuals knowledge and worries of the source of the risk. 170 Sjberg 1995. 171 Objective likelihood of a future risk event occurring is calculated by either induction or deduction. 172 Smithson 1989, p. 41. 173 Bernstein 1996. 174 See footnotes 144, 151 and 150. Page 47 However, the occurrence of low-probability risk events 175 over which people have little control 176 tends to be overestimated in peoples perception, 177 178 though people who have personally experienced a certain risk event in the past tend to be more realistic in their risk perception for a while. 179 180 Without diving into cultural, societal and biological risk perception differences it is safe to assume that the perception of the likelihood of climate risk sources developing into risk events and the perception of their potential impact tend to be slightly more overestimated than the perception of other general risk sources 181 developing into risk events, due to their low- probability nature and a lack of control people have over them. This does not necessarily affect the usefulness of the data and the comparability between risk sources, given there is an inherent predictive element to probability analysis and its use as predictive risk management tool has its limitations. 175 Lichtenstein et. al 1978; Kruger and Burrus 2004. 176 Rachman 1990. 177 McKenna 1993. 178 An example is the risk perception of getting involved in an airplane crash; while the objective risk is very small, many people are still afraid to fly given their risk perception. 179 Dolinski, Gromski and Zawisza 1987; Burger and Palmer 1992. 180 People rate themselves as better drivers than others, or they dont expect to die of smoking, though this unrealistic optimism changes once they do have an accident or once a family member dies of cancer. 181 See Figure 12 for an overview of other risk sources impacting global supply chains. Page 48 CHAPTER 2 RESEARCH METHODOLOGY The research studys methodology choice and utilization is discussed in this chapter. Informed by the research problem and objectives, as stated in Paragraph I.4, and supported by the nature of the data covered in the literature review the choices made towards research type and design are explained comprehensively in this chapter. 2.1 Introduction The main distinction in research approaches is the one between quantitative and qualitative approaches linked to two research paradigms, respectively labelled as positivism and phenomenology. A paradigm can be seen as the researchers world view, a general conception of the nature of scientific approach used, or simply a school of thought. 182 Positivism, or deductive research, moves from a general law to a specific case, top-down, outside-in or from theory to facts. Whereas phenomenology, or inductive research, moves from a specific case or series of observations to the formulation of general law, bottom-up, inside-out or from facts to theory. The first approach is used to test existing theories, not to create new ones, while phenomenology often focuses on developing new ideas through induction of data. 183 It should be mentioned that exploratory research is also qualitative in nature, but not part of the phenomenology paradigm. Key features of both paradigms are presented in Table 6 on the following page, showing that both approaches have their specific strengths and limitations. A mixed-method research approach not unknown in logistics and supply chain research 184 was chosen for this research study, applying quantitative and qualitative approaches within the research design to develop different perspectives, triangulate research findings and reduce the 182 Gummesson 2000; Mangan, Lalwani and Gardner 2004. 183 Mangan, Lalwani and Gardner 2004; Kovcs and Spens 2005; Parasuraman, Grewal and Krishan 2006; Blumberg, Cooper and Schindler 2008; Srivastava and Hopwood 2009; Saunders, Lewis and Thornhill 2012. 184 Nslund 2002; Mangan, Lalwani and Gardner 2004; Kovcs and Spens 2005; Sanders and Wagner 2011; Golicic and Davis 2012. Page 49 risk of method bias. 185 The approach is further explained on the following pages, but by combining the strengths of both approaches and validating results through an iterative process of data collection and verification, the design provides a stronger final result within the given time frame. Positivist paradigm Phenomenological paradigm Basic beliefs The world is external and objective Researcher is independent Science is value-free The world is socially constructed and subjective Researcher is part of what is being researched Science is driven by human interest Researcher should Focus on facts Look for causality and fundamental laws Reduce phenomena to simple events Formulate hypothesis and then test them Focus on meanings Understand what is happening Look at the totality of each situation Develop ideas through induction of data Preferred methods include Operationalising concepts so that they can be measured Taking large samples Random selection of subjects Using multiple methods to get different views of phenomena Small samples investigated in- depth or over time Purposive selection of subjects Methodologies Cross-sectional studies Experimental studies Longitudinal studies Questionnaires Models and simulation Action research Case studies Ethnography Construct elicitation Grounded theory Hermeneutics Participative enquiry Analysis Statistical Interpretive Table 6: Main research paradigms 186 185 Method bias is defined as unexpected variations in findings that are attributable to the measuring instrument / measurement method rather than to the constructs represented by the measures. 186 Based on the resources in footnotes 183 and 183. Page 50 The choice for a mixed-method research approach was inspired by the work of Luyt 187 on developing a cyclical mixed-method measurement framework as well as the research of Newman, Lim and Pineda 188 on content validity and mixed-method research approaches. Luyts work focuses on incorporating both qualitative and quantitative elements in a framework of measurement development, validation and revision 189 . He moves iteratively through a number of steps to refine the research concept and the research studys operationalization. The latter he refers to as indicator though it includes the definition, operationalization as well as the measuring instruments related to the research concepts. The main elements of his framework are presented in Figure 15 below. What has been taken over from this model is first of all the need to ground and conceptualize the research through a staged approach, further discussed below and in the following paragraphs. Secondly it shows the importance of refining the indicators through discussion, which inspired the development of an expert panel (See Annex 1) for reflection and refinement throughout the iterative research process. The panel was used in interviews (Paragraph 2.3) as well as final reflection (Paragraph 2.5). Figure 15: Luyt's 'Measurement development, validation, revision framework' 190 187 Luyt 2012. 188 Newman, Lim and Pineda 2013. 189 Luyt 2012, p. 298. 190 Ibid. Level 1: Establishing the concept Level 2: Systematized concept Level 3: Indicators Level 4: Qualitative and quantitative analyses Conceptualization Revisiting background concept Operationalization Modifying systematized concept Discussing indicators Refining indicators Page 51 Newman, Lim and Pinedas research focuses on content validity 191 . Their vision is that data by nature is developed through a mix of interacting qualitative and quantitative methods, thus a well-developed mixed-method approach will increase content validity. They present a mixed methods research interactive continuum 192 for which a simplified version is presented below in Figure 16. Taken over from their research is the need for re-validation, which was done by various verify & refine loops; through an iterative literature review process (Paragraph 2.2) as well as the earlier mentioned uses of an expert panel. Secondly the qualitative-quantitative research sequence was taken over, with the inclusion of a feedback loop towards the expert panel after data analysis to increase the self-criticality of the findings. Figure 16: Simplified version of Newman, Lim and Pinedas Mixed methods research interactive continuum 193 The iterative mixed-method design of this research in which stages of data collection and reflection are successively utilized to inform, verify and 191 See footnote 187. Content validity being the level to which certain measures, measuring instruments and questions are actually measuring all the elements of a subject area intended to be assessed. 192 Ibid., p. 248. 193 Ibid. Topic of interest Purpose / question Speculation / Theory / Research lens Area of interest / theoretical perspective Review literature Define terms Define research questions Knowledge base for research endeavour Qualitative research elements (start of research) Quantitative research elements (continued research) Page 52 refine subsequent research stages is visualized on below in Figure 17. The research stages, measuring instruments used in each stage and their interrelation are detailed in the subsequent paragraphs. Figure 17: The iterative mixed-method research design 194 195 194 Adapted from Luyt 2012, and Newman, Lim and Pineda 2013. Introduction First literature review: Orientation & Exploratory review Climate change Introduction Research questions, aim and objectives Chapter 1 Second literature review: Focused review Climate change & SCRMP Verify & refine Expert panel Interviews Glossary Terms and definitions Chapter 1 Second literature review: Refined review SCRMP Chapter 3 - Data analysis Chapter 4 - Discussion Chapter 3 Chapter 4 Inclusion of expert panel feedback Chapter 5 Conclusions and recommendations Verify, refine Verify & refine Internet-mediated questionnaire Page 53 Mixed-method research design bias, reliability and validity Positivist and phenomenological approaches as well as mixed-method approaches all have their specific types and levels of bias. 196 Design bias refers to a research studys failure to identify and treat reliability and validity problems inherent to the research design. To tackle design bias, the limitations of the research have been clarified in the Introduction and the bias, reliability and validity of the research as a whole and each of the research stage and related measuring instrument specifically are explained on the following pages. The researchs reliability refers to the confidence we can have in the consistency of the researchs measuring instruments. In positivist research this translates into the replicability or reproducibility 197 of findings, 198 thus the liking for quantitative research methods in the positivist approach. In phenomenological research reliability refers to the stability of responses towards the use of multiple coders to analyze transcript data 199 as well as the impact of the researchers role, 200 though the latter being mostly of importance in a (participatory) observation setting. With one person coding the answers there were no inter-coder bias issues. Validity is a traditional positivist construct and defined as the extent to which measurements and conclusions are well-founded and correspond accurately to the real world. Positivist research focuses on internal validity the correct proof of causal-relationships and external validity the generalizability of findings. In phenomenological research there are different views on validity, ranging from scrapping the concept all together 201 to new concepts being developed to capture validity. 202 The external validity and how this has been conceptualized in this mixed-method design is further discussed in Paragraph 2.7 on generalizability. 195 Informed by Thompson and Walker 1998; Mangan, Lalwani and Gardner 2004; Srivastava and Hopwood 2009; Denzin and Lincoln 2011; Miles, Huberman and Saldaa 2013. 196 Bias is defined as anything that could produce unexpected variations in the findings and as such poses a threat towards the research findings reliability and validity. 197 The debate on replicability vs. reproducibility is still ongoing. Drummond 2009. 198 Saunders, Lewis and Thornhill 2012, p. 192. 199 Creswell 2012, pp. 253-255. 200 Miles, Huberman and Saldaa 2013, p. 312 201 Dellinger and Leech 2007, p. 313; Wolcott 2008. 202 Dellinger and Leech 2007, pp. 313-321; Creswell 2012, pp. 244-250. Page 54 Whittemore, Chase and Mandle 203 provide a synthesis on validity in qualitative research and come to ten criteria with some conceptual overlap. This research took into account three phenomenological validity concepts, given their relevance towards the research design applied: 1. Substantive validation: Providing proof of understanding of the topic and documentation of this understanding through a rigorous and conceptually balanced literature review process. 204 The literature review is a stepped approach, further explained in Paragraph 2.2. The results of the first literature review form the foundation of the research problem, questions and objectives, visible in the researchs Introduction. A second literature review was executed to further refine research questions and objectives and to inform the subsequent steps of the iterative research design. Chapter 1 provides the results of the second literature review. 2. Criticality validation: Showing a critical appraisal for all aspects of the research, the sequence of measuring instruments and research findings through a credible data collection and analysis process. 205 The choice and foundation for the mixed-method research design has been explained earlier in this paragraph and in-depth explanations of each research step can be found in subsequent paragraphs. Criticality validation also includes self-criticality by collecting criticism, being open to different viewpoints and the peer reviewing of findings. 206 The researchs expert panel (Annex 1), further detailed in Paragraph 2.3, reflected on the literature review through 12 expert panel interviews. Full interview transcripts were shared with the interviewees afterwards for validation and further commenting. All interviewees received a narrative summary of the final interview results to reflect on and critique. They also received a draft outline of the internet-mediated questionnaire, further detailed in Paragraph 2.4, to comment on. The feedback received on all commenting cycles was used to improve subsequent research steps. A final round of expert panel reflection took place online after the data analysis was completed. Comments and critique on the data analysis have been incorporated into the final report. 203 Whittemore, Chase and Mandle 2001. 204 Ibid., p.531; Creswell 2012, p. 248. 205 Eisner 1991, pp. 110-112; Whittemore, Chase and Mandle 2001. 206 Eisner 1991, pp. 112; Creswell 2012, p. 246. Page 55 3. Credibility validation: Providing evidence that allows for having confidence in the measuring instruments, analysis and conclusions through referential adequacy, data triangulation and the peer reviewing of findings. 207 Referential adequacy refers to iterative steps of data analysis in which earlier results are added to the data analysis to test the validity of the findings. Results of the expert panel interviews, explained in Paragraph 2.3, are first analyzed separately from the results of the subsequent internet-mediated questionnaire. After a first analysis, results of both the interviews and the questionnaire are taken together to test the validity of the findings and triangulate results. As explained under the previous header on criticality validation there is an iterative feedback and commenting process with the researchs expert panel members (Annex 1). After the internet-mediated questionnaire, further detailed in Paragraph 2.4, interview data was also shared with the expert panel for peer-reviewing and commenting on the results as well as the analysis process. Each research stage, each measuring instrument applied, has its specific method bias, which is discussed in the subsequent paragraphs for each research stage and related measuring instrument individually. Steps taken to minimize bias and increase validity in each method applied are explained, to make sure the iterative research design does not result in bias from one method impacting and being reinforced by a subsequent research stage. 208 Method and data triangulation The combining of quantitative and qualitative methods to verify and complement research findings is known as method triangulation 209 and used to increase the research studys reliability and validity by confirming data generated by one method through the results of another method. 207 Lincoln and Guba 1985, pp. 213-219; Patton 2001, p. 247; Cresswell 2012, p.248. 208 Mangan, Lalwani and Gardner 2004; Miles, Huberman and Saldaa 2013. 209 Thompson and Walker 1998, p. 68; Mangan, Lalwani and Gardner 2004, p. 569; Tharenou, Donoheu and Cooper 2007, p. 131 and 257; Harrison and Reiley 2011, pp. 8-10; Oslund et al. 2011, p. 371. Page 56 Data triangulation 210 is used by collecting data from different sources being the literature review, expert panel and questionnaire respondents to increase data validity and reliability by collecting data from three independent sources that either agree, or at least do not contradict one another. 2.2 Literature Reviews A literature review often forms the start and foundation of a research study, irrespective of the study being positivist, phenomenological or mixed in nature. 211 There are various definitions and terms to describe the activities part of a literature review, for example critical review, research review, research synthesis, theoretical review or meta-analysis. 212 Two types of literature review that can be distinguished are those that are detailed independent works on their own, like a meta-analysis, and those that form the introduction to new research. The aim of the literature review process was to develop the boundaries and to shape the foundation of the research study. A first literature review focused on the concepts and arguments forming the foundation for the research objectives. A second literature review was developed as a critical analysis of the existing body of knowledge and its relation towards the research study. The latter also informed the mixed-method research design. Literature review approach A stepped literature review approach, presented in Figure 18 on the next page, was devised and implemented. The review method was informed by a selection of research science literature, 213 the most important being Dixon- Woods et al.s approach termed critical interpretive synthesis and secondly Miles, Huberman and Saldaas approach called data condensation. 210 Mangan, Lalwani and Gardner 2004, p. 569; Tharenou, Donoheu and Cooper 2007, p. 81 and 129. 211 A reason to not perform a literature review might be the absence of an existing body of knowledge on the topic being researched, though that was not an issue in the case of this research study. 212 Cooper 1998; Miles, Huberman and Saldaa 2013. 213 Dixon-Woods et al. 2006; Liston 2006; Cronin, Ryan and Coughlan 2008; Barnet-Page and Thomas 2009; Saunders, Lewis and Thornhill 2012; Miles, Huberman and Saldaa 2013. Page 57 Critical interpretive synthesis 214 was used to synthesize multi-disciplinary qualitative as well as quantitative evidence and refine the research questions in an iterative process. Data condensation focused on the process of selecting, focusing, simplifying, abstracting and/or transforming the data that appear in the full corpus of [] materials. 215 274 pieces of literature have been evaluated in total, of which 218 were seen as relevant to the research studys topic. A first review was part of the proposal development stage, comprising of an initial literature orientation and an exploratory literature review, in which 64 pieces of literature have been evaluated and used that focus on the climate change context in relation to corporate processes and supply chains. Figure 18: Stepped literature review approach After formulating the initial research problem, questions and objectives, a second literature review took place to further refine the research questions and objectives and to inform the research design. A focused literature review took place in which 87 pieces of literature have been used to finalize the research questions and objectives, and to inform and aid subsequent steps of the research design. 214 Dixon-Woods et al. 2006, pp. 38-39; Flemming 2010, p. 202. 215 Miles, Huberman and Saldaa 2013, p. 12. Initial literature orientation Exploratory literature review Climate change Focused literature review Climate change & SCRMP Refined literature review SCRMP Interest Management questions Initial research questions Final research questions First literature review Second literature review Page 58 The final element of the second literature review further refined the research studys focus, reviewed all previously analyzed literature and took into account 67 new pieces of literature. Chapter 1 stems from this review and the literature review findings informed and were validated by the expert panel interviews, and informed the internet-mediated questionnaire. 216 Please note that the Harvard referencing system has been used to reference all literature throughout this research report. But given the large quantity of literature applied throughout the text, the Harvard referencing system has been adjusted by referencing in the footnote and not the main text. This was a consciously made alteration to improve the reports readability. Literature review- bias and validity Confirmation bias: People have the tendency to test ideas in a one-sided way, focusing on one possibility and ignoring alternatives. 217 This holds true for the way in which people search for and select literature as part of the literature review process. The expert panel members (Further discussed in Paragraph 2.3) were asked to reflect upon the literature review and panel members were chosen to render different perspectives towards the research objectives and its underlying foundation, being the literature review. Primacy effect: Information is weighted more strongly when it appears early in a series 218 of information reviewed. To counter-act this effect, the literature review followed a stepped approach, in which the last part of a previous review became the starting point for the subsequent review step. Illusion of validity: Refers to the belief that more information generates additional relevant data for predictions, even when it does not. 219 220 The literature review process had a clear deadline, to make sure there would not be an endless gathering of information. It also followed a stepped approach to guarantee that information gathering and analysis were targeted. 216 Liston 2006; Blumberg, Cooper and Schindler 2008; Cronin, Ryan and Coughlan 2008; Klein and Olbrecht 2011; Saunders, Lewis and Thornhill 2012. 217 Nickerson 1998. 218 Ibid., p. 187. 219 Khaneman 2011. 220 This is referred to as information bias in decision-making science, i.e. the belief that more information will result in better decisions, even if that information is irrelevant to that decision. Page 59 Moreover, the review was presented to the expert panel to give feedback on its content and relevance. Through critical interpretive synthesis 221 the research problem, questions and objectives were refined in an iterative process, which included feedback from the expert panel members through individual interviews (See Paragraph 2.3). An iterative approach was also used in the second literature review, in which data condensation 222 aimed at abstracting the right information out of the body of knowledge used, further verified and refined by the expert panel interviews, resulting in both substantive as well as criticality validation. 2.3 Expert Panel Interviews A research expert panel 223 was developed for reflection during research design, data collection and subsequent data analysis. Annex 1 provides an overview of the expert panel members. 12 Of the 14 experts were interviewed. The selection of expert panel members, interview process and bias and validity considerations are further described below. Selection of expert panel members The expert panel members have been chosen on their supply chain and/or risk management expert knowledge, their opposing views and differences in industrial sector focus. Some experts come from a sustainability perspective, while other focus more on business continuity; some believe in climate change, while others dont; commercial as well as humanitarian supply chains are represented, and experts come from a variety of sectoral backgrounds, being food, agri, non-food, health, electronics, transport and aviation supply chains. An appropriate mix of practical vs. academic experience and expertise, topical depth and width, and geographical focus was also taken as point of departure when approaching experts to take part in the researchs expert panel. 221 See footnote 213. 222 See footnote 214. 223 DSE 2005; Slocum 2005; Gossage 2013. Page 60 The preliminary use of the expert panel discussed in this paragraph was to explore and verify the data collection and consolidation process informed by the literature review, with a focus on the first three research objectives (RO1-RO3). Also considered is how the literature review data informs the next research stage of the internet-mediated questionnaire. Expert panel interview process In one-on-one interview sessions 224 expert panel members reflected on the literature review, its relation towards the research objectives and how this informed the subsequent research step. The interviews were developed as semi-structured non-standardised one- on-one internet-mediated interviews to inform, verify and refine the descriptive elements of the first three research objectives. The first research objective is non-descriptive, but interview questions focus on describing how climate change and extreme weather events have impacted supply chains, to inform the development of questions for the subsequent internet- mediated questionnaire. The experts were informed at the interviews start about the process and expectations, including consent on data use and privacy considerations. The introduction and consent can be found in Annex 3. The interview protocol is provided in Annex 4. The transcript of each interview was shared with the interviewee for verification purposes and reflection. Verified transcripts can be found in Annex 5. These were coded and analyzed in MaxQDA 11, qualitative data analysis software. 225 226 224 Knox and Burkard 2009; Creswell 2012, pp. 163-166. 225 MaxQDA 11 qualitative data analysis software allows to classify, sort and arrange information, examine relationships in the data, and combine data analysis with linking, shaping, searching and modeling. For more information: http://www.maxqda.com/ 226 The MaxQDA 11 data file will be kept for 5 years after the date of publication. The file can be requested from the researcher by email (Dpbours@yahoo.com) for academic verification purposes. Page 61 Expert panel interview- bias and validity Selection bias: This generally refers to sample selections not representing the wider population. 227 In this case, selection bias can be explained as the selection of expert members based on the idea that those selected will confirm existing beliefs or hypotheses. To counteract selection bias, expert panel members have been selected with the aim to create a panel as diverse as possible with different views and perspectives, resulting in richer data and a more critical analysis of results. Participation bias: In this context participation bias is a bias of some participating more than others in the expert panel. In the case of the interviews, all experts interviewed received the exact same questions. Of the expert panel, 12 of the 14 members have been interviewed. Social desirability bias: The tendency to answer sensitive questions in a way that might be seen as favourable or socially accepted by the interviewer, 228 which is a type of bias especially impacting interviews. 229 Interview questions have been formulated in a way they are not seen as sensitive; there are no taboo topics, there is no socially desirable answer to any of the questions and interviewees review the full transcript to make sure no information will be shared that can be seen as disclosure sensitive. Interviewer bias: Interviewer bias refers to differences between interviews in information collection and recording, 230 as well as the misinterpretation of the information received through these interviews. Interview questions (Annex 4) have been tested on a small group of experts, not part of the expert panel. They were asked to describe what they thought the questions were asking of the interviewees. To limit misinterpretation, exact narratives of each interview have been sent to the interviewees to verify the resulting text. In these narratives, comments were added by the interviewer if there were possibly ambiguous answers. These were then clarified by the interviewee. The final narratives are available in Annex 5. 227 Collier and Mahoney 1997, pp. 59-60; 228 Tourangeau and Yan 2007. 229 Ibid., pp. 863-864. 230 Saunders, Lewis and Thornhill 2012, p. 381. Page 62 Order-effect bias: 231 Respondents develop a frame of reference from a previous question and carry over it to the next question. 232 The sequence of interview questions moves from the simpler to the more complex questions. Efforts have been made to pose questions as neutral as possible, that if any frame of reference would be developed, this comes from the interviewees experience and vision and not the interview questions. Instruction bias: This type of bias occurs if unclear or no instructions are given at the interviews start. The instructions provided to each interviewee can be found in Annex 3. After the introduction the interviewee was given the opportunity to ask questions regarding the process. A conscious choice was made not to provide the questions in advance in order to get more honest responses and not answers based on an internet-search on the topic, instigated by receiving the interview questions in advance. Other types of interview bias, like dominant respondent bias, refer to non- verbal communication. 10 of the 12 interviews took place online and non- verbal communication bias is not expected to have influenced the results. Expert panel interviews: Feedback on the literature review Expert panel members were asked to provide critical feedback on the literature review. This feedback resulted in the following adjustments: - A list of research limitations was added to the Introduction - Bow tie risk assessment was reviewed, but not added to the review - The 3BL part in the Introduction was condensed - A clearer distinction has been made between climate and sustainability risks if there was a need for clarification - The risk management definition and choice for it was further clarified - The description of Level 4 in Table 2 was adjusted - A note was added to Figure 6 on the actions in case of risk events - A note was added to Figure 11 regarding cause and effect between the number and cost implication of natural disasters 231 Also referred to as priming effect or context effect. 232 Perrault 1975, pp. 544-545; Schober 1999, pp. 88-89. Page 63 - A detailed explanation was added to Figure 13 on risk events often being a mix of direct and indirect risk events and compounding factors - Business vulnerability assessment and the insurance industry were added to the discussion on climate risk indicators - Avoidance was added as operational risk adaptation/mitigation strategy, and contracting out was added as an example of avoidance - A more in-depth analysis of research methods and choices made - Adjustments were made to the referencing and a number of compound statements have been divided into multiple references. Expert panel interviews: Input towards the internet-mediated questionnaire Expert panel members were also asked to provide input towards the internet-mediated questionnaire, the next research stage. This feedback resulted in the following adjustments: - Less terminology was used in the questionnaire - Impacted was changed to more than marginally impacted in all questions on risk event impact - Risk event questions focus on the respondents insights, attitudes and perceptions on how risk events impacted supply chains - A differentiation was added between the companys head office location, the respondents work location and the respondents nationality to be able to review geographic differences in answers - Seniority questions were added to see if there will be a difference in answers depending on seniority as well as level of responsibility - Decision-making capability questions were expanded - The target group was expanded to also include sustainability officers as well as financial management, financial decision-makers. 2.4 Internet-Mediated Questionnaire The internet-mediated questionnaire covered all 6 research objectives (RO1-RO6). The questions were designed in a way that generates the data necessary to answer and accomplish the research objectives, either directly or through response analysis, as visualized in Figure 19 on the next page. 233 233 Based on English 2008, p. 11, fig. 10.1. Page 64 Figure 19: Link between researcher and respondents The questionnaire design process 234 , visualized in Figure 20 on the following page, is an iterative process with various loops to get to a draft questionnaire for pilot testing and final questionnaire. Main steps in the questionnaire development process 1. Questions are evaluated on form and structure, seeking to balance open and closed questions and using standardized and proven answer categories. For example, economic sector categories follow UNDESA International Standard Industrial Classification (ISIC) codes, 235 company size categories are based on European business size standards, 236 likelihood categories are based on the IPCC standards 237 and accepted 5-point Likert-type scales are used for (dis)agreement statements. 238 Closed answer categories were further reviewed with a focus on sequence of options and the MECE principle; mutually exclusive and collectively exhaustive. 239 2. A second verification focused on relevance and wording in order to receive meaningful and valid responses. Relevance was checked by looking at whether the research objectives could be answered without asking certain questions. 234 Based on English 2008, p. 13, fig. 10.2. 235 UNDESA 2008. 236 EC 2005. 237 See footnote 50. 238 A 5-point scale as answer option on one question is referred to as a Likert item. Likert scaling, which is the sum of various Likert items, is used for the four questions on Page 3 of the internet- mediated questionnaire (See Annex 7) focusing on authority. 239 Mutually exclusive means that not more than one individual answer option can be true at the same time. Collectively exhaustive ensures that all answer options cover the entire realm of possibilities. Researcher Respondent Internet- mediated questionnaire Translating data requirements into questions and instructions Interpreting questions and instructions Providing / recording the responses Interpreting / analyzing the responses Page 65 Wording focused on the introduction, relevance towards and frame of reference of the target group, clarity, transparency, objectiveness and complexity of questions and answer categories for closed questions. Figure 20: Questionnaire design process Translate research objectives data requirements into rough questionnaire draft Revise the rough draft Check question form and structure Changes Needed? Check question relevance and wording Check sequencing of questions Check layout and appearance Changes Needed? Changes Needed? Changes Needed? No No No No Yes Yes Yes Yes Other checks needed? Make necessary checks Yes Piloting of rough draft No Make changes needed Another pilot needed? Yes Prepare final questionnaire Page 66 3. The positioning of sensitive questions was considered 240 and related questions were clustered, limiting the number of skip patterns and funnelling questions from simple to more complex. 4. A last check focused on layout and appearance, taking into account attractiveness, ease of use as well as professionalism. The number of mouse clicks, mouse movements and needed key strokes were limited. The online appearance was checked on different screen resolutions, browsers and operating systems. A face-to-face computer-mediated pilot test was executed with respondents comparable to the questionnaires target population, to check points of confusion by observing the non-verbal communication of the respondent and being available to clarify questions. Questionnaire target population The target population is professionals working in the following fields: Supply chain, logistics operations / management Procurement, sourcing, or contract management Organizational risk management / Risk management Quality assurance / Quality management Corporate Social Responsibility (CSR) / Sustainability Financial management / Financial decision-making Academic research on any of the above fields Consultant / advisory function to any of the above fields These professionals were targeted through professional supply chain management, procurement, risk management and leadership associations, attendance overviews of conferences and workshops, the network of the expert panel members and online communities of practice. 240 There were no truly sensitive questions in the sense of question regarding negative social behavior, but personal questions on gender, position and level of seniority were put at the end of the questionnaire. Page 67 It is hard if not impossible to provide an accurate number of the global target population. Moreover, probability or random sampling assumes that anyone in the population has an equal chance of being selected for the sample. This is not true given the internet-mediated nature of the questionnaire and the snowballing through online associations, communities of practice and professional networks. 241 The calculation of a sample size has only been pursued to render a certain level of response validity, not to generalize towards a global population of specialists. With a confidence level of 95% and a 5% margin of error a sample size between 377 and 385 responses was pursued. 242 In the end, 393 fully completed surveys were received, resulting in a 4.89% margin of error if random sampling would have been pursued. The questionnaire introduction, including an identification of the researchs target population, can be found in Annex 6. The internet-mediated questionnaire is represented in Annex 7, including the explanation on the skip-logic applied. IBM SPSS Statistics 22 243 was used for the data reviewing and analysis, while MS Excel 2007 was used for developing the graphical representations. Given its extensive size, the codebook and dataset have not been added to this report, but are available upon request. 244 Internet-mediated questionnaire - bias and validity Bias and validity elements discussed earlier will not be conceptually explained again, but measures to limit their influence have been discussed if relevant towards the questionnaire. 241 Only those global professionals with access to internet and being part of associations, communities of practice and/or professional online networks have a chance of filling out the questionnaire. 242 A population size of 20,000 (ss=377) to infinity (ss=385) was used for the calculation. ss = [Z 2 x p x (1-p)] / c 2 = [(1.96) 2 x 0.5 x (1-0.5)]/(0.05) 2 , ss_20K = ss / [1 + ((ss 1)/20K)] 243 SPSS is among the most widely used programs for statistical analysis in social science. 244 The SPSS 22 questionnaire codebook and dataset will be kept for 5 years after the date of publication. The file can be requested from the researcher by email (Dpbours@yahoo.com) for academic verification purposes. Page 68 Selection bias: 245 The sample is not assumed to represent a specific target population given earlier presented research constraints towards both the population and the questionnaires sample. This will however not impact the internal validity given that questionnaire non-participation is not expected to be linked to the independent variables, 246 i.e. not having an online presence as professional is not proven to be related to the occurrence and impact of climate risk events and related risk management. Non-response bias: Strongly related to selection bias, non-response bias occurs when non-respondents differ from respondents in what they would have answered. 247 Given it is impossible to know what non-respondents would have answered and not knowing the exact target population it will be hard to identify differences between respondents and non-respondents in order to provide meaningful commentary on non-response bias. Response bias: Response bias is a questionnaires equivalent to social desirability bias in interviews, e.g. respondents answer in a way they think the research wants them to answer rather than according to their own beliefs. Questions are developed to be non-leading and the questionnaire is being administered anonymously limiting the risk of pleasing answer behaviour. Order-effect bias: 248 The question sequence moves from the simpler to the more complex questions. Efforts have been made to pose questions as neutral as possible, that if any frame of reference would be developed, this comes from the respondents experience and vision and not the questions. Instruction bias: Clear instructions were provided at the start of the questionnaire and can be found in Annex 6. 2.5 Expert Panel Reviewing Following the internet-mediated questionnaire an internet-mediated expert panel reviewing of a draft data analysis enhanced the analysis, findings and conclusions and resulted in new analytical insights through dialogue. 245 See footnote 227. 246 Cuddeback et al., p. 21. 247 Whitehead, Groothuis and Blomquist 1993, p. 215. 248 See footnotes 232 and 232. Page 69 The experts of the expert panel interview were extended with a number of experts who indicated to be interested in participating in the questionnaire follow-up. The reviewing exercise was flat-structured, with no specific tasks assigned to individual members and discussion open to be thought provoking to limit the possibility of collective shrinking 249 . The researcher facilitated the reviewing exercise, though with no management line towards any of the reviewing experts, limiting the possibility of groupthink developing. 250 The participating experts were informed at the start of the reviewing about the timeframe and expectations. 2.6 Data Analysis Data analysis is the process for the analysis of qualitative data that involves three concurrent sub-processes of data reduction, data display, and drawing and verifying conclusions. 251 Various data analysis process elements have already been talked about in previous paragraphs. For example when discussing the iterative research methods design, the method and data triangulation processes, the software tools used as well as the approaches applied to increase credibility and validity. A template analysis approach 252 was used to code interview questions and answers to represent the themes revealed from the data collected. Answer categories were developed and attached to units of data in order to explore themes and patterns. MaxQDA 11, qualitative data analysis software was used to facilitate the coding and analysis process. 253 The questionnaire results were reviewed and analyzed in IBM SPSS Statistics 22 with a focus on correlations and verification steps in line with the data type, while MS Excel 2007 was used for developing the graphical representations. 249 Shared responsibilities result in no one taking responsibilities. 250 Janis 1982; Janis and Hart 1991; Langfeldt 2002. 251 Saunders, Lewis and Thornhill 2012, pp. 669. 252 King 2012. 253 See footnotes 226 and 226. Page 70 Facilities and Special Resources Used The literature review process was supported by the use of RefWorks. 254 All literature was tagged on content to show relationships between all literature resources reviewed. The online Surveymonkey questionnaire development software was used to develop, administer and analyze to some extent the questionnaire. The interview data analysis took place by means of MaxQDA 11 qualitative data analysis computer software. The questionnaire data was reviewed and analyzed by means of the IBM SPSS Statistics 22 software programme. 2.7 Generalizability of Findings The limited timeframe in which the research took place affected choices made with respect to the research design. Due to the partially qualitative nature of expert panel data and the internet-mediated snowballing approach chosen for the questionnaire-element, only moderatum generalizations of primary data results towards the wider supply risk management population are possible on the basis of inductive reasoning and the identification of structural homogeneity and particular similar characteristics between the context in which the research results were obtained and other contexts on which these findings could be projected. 255 We also have to accept that in the real world the generalization of research findings is always subject to vulnerability: ...even if the inquiry in a particular context is meant only to guide decisions about the operation of that context in a succeeding time frame, time will change both the context and the individuals who are in it. 256 In that sense it makes more sense to talk about contextual transferability 257 , where findings can be transferred in cases where there are similarities between the research and the real world context. The burden of proof of such contextual transferability lies with the person in the receiving context wanting to make use of this researchs data and conclusions. 258 254 Refworks is an online research management, writing and collaboration tool. More information can be accessed on http://www.refworks.com/. 255 Schutz 1982; Williams 2002. 256 Erlandson et al. 1993, pp. 31-32. 257 Halldrsson and Aastrup 2003, p. 327; Saunders, Lewis and Thornhill 2012, p. 194. 258 Guba and Lincoln 1989. Page 71 CHAPTER 3 DATA FINDINGS Findings of the expert panel interviews and internet-mediated questionnaire are presented in the subsequent paragraphs. The data is analyzed and synthesized, aimed to answer the research questions to which they relate. 3.1 Introduction The relationship between interview and questionnaire questions and the research objectives is presented below in Table 7. Research objective Interview questions Questionnaire questions RO1. To identify whether supply chains have been more than marginally impacted by physical climate change and extreme weather events over the past three years. Q.1, Q.2, Q.6 Q.12, Q.13, Q.14 RO2. To identify the perceived extent of negative consequences of climate risk events on the supply chains impacted. Q.3, Q.5 Q.15, Q.16, Q.17 RO3. To identify the climate risks, risk indicators and related risk categories used in companies Supply Chain Risk Management Processes (SCRMP). Q.4, Q.7, Q.8 Q.19, Q.20 RO4. To analyze climate risks by identifying their consequence severity, risk likelihood, levels of risk exposure and thus risk ranking. - Q.15, Q.16, Q.19 RO5. To make recommendations on implementing this information into the SCRMP. - Q.18 RO6. To describe how this can inform management decision-making to improve supply chain resilience. - Q.8, Q.9, Q.10, Q.11 Table 7: Relationship between research objectives and questions Page 72 3.2 Expert panel interviews 12 Expert panel interviews took place. The expert panel selection and interview process is discussed in Paragraph 2.3. An overview of expert panel members can be found in Annex 1. The interview protocol is provided in Annex 4. The verified interview transcripts are available in Annex 5. These were coded and analyzed in MaxQDA 11 software. 259 Supply chains and climate risk events Do you feel supply chains have been more than marginally impacted by physical climate change and extreme weather events (to be called: climate risk events) over the past three years? (Question 1) Figure 21: Interview Q1: Supply chains impacted When you are talking about individual events you are talking about extreme weather. When you are talking about longer term trends you are talking about climate change. 260 I dont want to be lured into the trap of mistaking each extreme weather event for a climate change event, but I would say that over an extended period of time climate change has absolutely impact a range of supply chain issues. 261 259 See footnotes 226 and 226. 260 See Interview 6 Ira Feldman, Question 1, Annex 5. 261 Ibid. 8 4 Yes, climate change and extreme weather events Yes, extreme weather events Page 73 The scientific panels are keen on the idea that the climate will change over time and that climate risk events will occur more frequently, but were not entirely clear yet in what way it will change. We will need to take this into account when planning for the long term, but a lot of supply chains are not planned for the long term and the focus in these will mainly be on short term extreme weather events. 262 Any climatic event will have an impact on supply chains, particularly in an era in which we are moving towards leaner supply chains with less inventory held in different points within the supply chain. 263 I tend to keep a short-term view on this and focus on extreme weather events, given that the climate change discussion makes no difference to the need to risk manage the increase in extreme weather events and their impact on supply chains. 264 Longer term climate change by definition is slow and the changes are incremental, which makes it difficult to see them from year to year. 265 Can you give a few examples of supply chains being impacted by climate risk events? (Question 2) Examples given: Thailand floods (9); Japanese tsunami (4); Hurricane Sandy (3); Hurricane Katrina (3); Bangladesh floods (2); South Australian 12-year drought (2); Indonesian tsunami; Southeast China typhoons; Southern Thailand monsoons; Australian floods; Water stress in the Californian central valley; Drought impacting barge transport on the Mississippi river; Snowstorms shutting down airports in the Northeast of the United States; East Congo changes in rainy seasons; Zimbabwe drought. The types of climate risk events mentioned have informed the answer possibilities in two survey questions on the past and potential future occurrence of climate risk events impacting supply chains. 266 What you see is more extreme precipitation patterns, both resulting in more flooding as well as more droughts. 267 262 See Interview 7 Peter Jones, Question 1, Annex 5. 263 Ibid. 264 See Interview 9 - Colin Airdrie, Question 1, Annex 5. 265 See Interview 10 Michael Keizer, Question 1, Annex 5. 266 See Question 14 and Question 15, Annex 7. 267 See Interview 10 Michael Keizer, Question 2, Annex 5. Page 74 From a risk management perspective; should climate risks and risk consequences on supply chains be of growing concern, or not? (Question 6) Everyone agreed that climate risks consequences on supply chains should be of a growing concern. Supporting statements: It should be part of the risk analysis of any supply chain. Supply chain risk management is becoming a more significant activity. In the past that included things like potential price changes, potential for loosing facilities or suppliers, etc. It makes sense to add climate-based and for example extreme weather risks to those same type of calculations. 268 There is the chance for customers to migrate either physically or migrate in the sense of need and preferences with a changing climate. It is possible that consumer preferences continue to move towards companies who are actively mitigating climate change. 269 I think that the concern is heightened by recent extreme and more numerous weather events. That in itself is an indicator towards a longer-term trend of a changing climate and therefore the corporate entity not only needs to take it into account in traditional risk management issues, but also in the corporate culture towards a need for a culture and individual behaviour change that might be needed as these trends continue. 270 I think people have up to now worked on the assumption that the supply chain they set up was relatively robust and they havent taken into account the climate risk factors. 271 Yes, but only because they have been of no concern, because they have been neglected. 272 In theory I would say no, because if you have not taken it into account in your risk management yet then youre very late. The reality is that there are still organizations who havent, so yet it will probably have to be of a growing concern. 273 268 See Interview 5 Peter Murray, Question 6, Annex 5. 269 See Interview 1 Taylor Wilkerson, Question 6, Annex 5. 270 See interview 6 Ira Feldman, Question 6, Annex 5. 271 See Interview 7 Peter Jones, Question 6, Annex 5. 272 See Interview 9 - Colin Airdrie, Question 6, Annex 5. 273 See Interview 10 Michael Keizer, Question 6, Annex 5. Page 75 People realized [climate risk] events could occur, they could be bad, however no one cares until your bottom line is being impacted. 274 Extent of negative consequences of climate risk events How would you describe the extent of negative consequences of climate risk events on supply chains? (Question 3) Any thoughts on how to quantify climate risk consequences? (Question 5) Trying to overly quantify a risk, making it too precise, almost would make it become meaningless. In most cases there are enough unknowns that you would not have a very high confidence in a very precise level of measurement. 275 If you take the three basic supply chain criteria, cost, quality and time, you see that climate risk events immediately affect two of those. 276 From my experience the very lean supply chains with very little to no alternatives in terms of different suppliers, places of sourcing, and so forth are typically impacted harsher by climate risk events. 277 It is not necessarily only the number and intensity of risk events increasing, but also the risk consequence. Leaner supply chains, urbanization, population growth, a changing social fabric and environmental degradation all increase the consequences of a risk event, the effect it will have. 278 The impact of various risk events over the past years shows how resilience plays a role there as well. When you look at the droughts in Southern Australia lasting for 12 years the theoretical impact would have been much more severe than the drought in Zimbabwe last year that lasted only a couple of months the Australian systems, including the logistics systems, were much more resilient being built to deal with it. Even though the seriousness of the climate risk event in Australia was much larger than the one in Zimbabwe. 279 274 See Interview 11 Steve Leon, Question 6, Annex 5. 275 See Interview 3 Kevin Watson, Question 4, Annex 5. 276 See Interview 7 Peter Jones, Question 3, Annex 5. 277 See Interview 8 Gyngyi Kovcs, Question 3, Annex 5. 278 Ibid., Question 6. 279 See Interview 10 Michael Keizer, Question 3, Annex 5. Page 76 Proposed indicators for measuring the extent of negative consequences are shown below in Table 8, together with the frequency of them being mentioned by the interviewees. Cost-related 42 Demand, customer-base related cost 8 Lost profit 5 Cost increases 4 Lost revenue 5 Cost of substitution / alternatives / Flexibility cost 3 Cost of supplier base issues 3 Value of cargo lost 2 Loss of market share 2 Lost revenue as % of total yearly revenue 1 Lost revenue in a certain business segment 1 Redundancy cost 1 Value of damage to facilities exposed 1 Decline of stock value 1 Increase in insurance premiums 1 Loss of productive assets 1 Cost of risk adaptation/ mitigation actions 1 Climate change attrition cost 1 Cost of termination of operations 1 Time-related 14 Lead time, schedule consequences 4 Time lost during event 4 Time element of operations termination 2 Time to recover 2 % of not on time delivery 1 Delay in product introductions 1 Cost and time related 11 No service provision all together / Cost & time of down time / Lost production 5 Delay of deliveries 2 Lack of materials 1 Decreased accessibility 1 Exacerbation of natural resource shortages 1 Increase in supply-demand mismatches 1 Table continued on the following page. Page 77 Other (including social indicators) 11 Trust, reputational consequences 2 Loss of life 2 Social impact 1 Effects on inventory turnover 1 Increased vulnerability 1 Employee safety 1 Labor standards 1 Metrics on response effectiveness 1 Metrics on responsiveness of event governance systems 1 Table 8: Indicators for climate risk consequences These indicators have been used as answer possibilities in the survey. 280 Climate risks, risk indicators and risk categories The risk consequence as used in a risk matrix has a scale from 'negligible' - 'minor'- 'moderate' to 'severe' and finally 'critical'. Does the use of such a scale allow for objective results and comparison between risk events? (Question 4) Figure 22: Objective use of risk matrices Within a company risk matrices allow for comparison and facilitate prioritization decisions on which risks to address first. 281 280 See Question 17, Annex 7. 281 See Interview 1 Taylor Wilkerson, Question 4, Annex 5. 3 3 6 Yes Yes, with some constraints No Page 78 When you start looking across companies you have to consider that there is a relative scale there in what is considered critical or catastrophic by each company or industry. 282 Id be interested to find out how many companies are actually using such a scale?! 283 The crux of the problem of risk analysis of climate change is the non- linearity. It should identify where the company should not go first and foremost, as well as what they may be able to ask of their suppliers as minimal safeguards. 284 There would be little value in after the fact comparison, because it is questionable how predictive you can be on climate change with a risk matrix. Apart from everyone agreeing that it was bad, trying to take that data and feed it into a predictive model would be very helpful. 285 Yes, risk consequence scales might help on a conceptual level for discussions. But whether they really help in practical risk management is an open question. A lot will depend on the assessors of the risk matrices and on the level of acceptance of the findings by the audiences for such risk matrices. 286 Of course over a large sample you would get some sort of consensus with a scale like that. The problem would perhaps be bigger if comparing various types of risks, but even objectively comparing one type of risk between locations can be difficult with such scales. 287 Any kind of scale like that is a perception scale and risk perceptions have a lot to do with cultural differences, the history of the respondent and his exposure to particular risks over time, which could result in complacency. 288 First of all, there are no generally accepted scales of risk consequences. And secondly, it is probably even more subjective than the likelihood of risk events occurring. 289 282 Ibid. 283 See Interview 2 Steven Dunn, Question 4, Annex 5. 284 See Interview 4 Nancy Gillis, Question 4, Annex 5. 285 Ibid. 286 See Interview 10 Michael Keizer, Question 4, Annex 5. 287 See Interview 8 Gyngyi Kovcs, Question 4, Annex 5. 288 Ibid. 289 See Interview 10 Michael Keizer, Question 4, Annex 5. Page 79 Could you come up with climate risk indicators to be used in companies Supply Chain Risk Management Processes (SCRMP)? (Question 7) It is Niels Bohr 290 who said: Prediction is very difficult, especially if it's about the future. 291 There is no need to waste time and effort to monitoring a basket full of metrics if a lot of them dont really measure any impacts in the context of a specific supply chain. 292 We might need to look outside of our field to get the information we would need for climate risk prediction. 293 Climate change and environmental sustainability pose place-based risks, i.e. exact geographic locale is of importance 294 You have to look at the micro-climate level to get a useful level of accuracy. 295 There are so many possible indicators and it totally depends on the context of the company. The indicators for Philips would be very different from indicators for Amazon to take two organizations. Even within one sector there can be differences, depending on where your facilities are located both geographically as well as from the upstream-downstream supply chain level perspective. 296 I dont think longer term climate change indicators are relevant to companies, at least not from a supply chain perspective. The translation of short term weather information into decisions is what companies probably should invest in. 297 Indicators discussed are shown in Table 9 on the following page, together with the frequency of these being mentioned by the interviewees. These indicators have been used as answer possibilities in the survey. 298 290 Niels Bohr (7 October 1885 18 November 1962) was a Danish physicist, scientific researcher and philosopher who made foundational contributions to understanding atomic structure and quantum theory. In 1922 he received the Nobel Prize in Physics. 291 See Interview 10 Michael Keizer, Question 4, Annex 5. 292 See Interview 3 Kevin Watson, Question 7, Annex 5. 293 See Interview 11 Steve Leon, Question 7, Annex 5. 294 See Interview 4 Nancy Gillis, Question 7, Annex 5. 295 See Interview 9 - Colin Airdrie, Question 7, Annex 5. 296 See Interview 10 Michael Keizer, Question 7, Annex 5. 297 See Interview 12 Sander de Leeuw, Question 7, Annex 5. 298 See Question 20, Annex 7. Page 80 Temperature related 6 Changes in temperature 4 Temperature forecasts 1 Long term temperature differential 1 Precipitation/water related 13 Changes in precipitation level 3 Changes in precipitation intensity 2 Rising sea levels 2 Changes in water/drought conditions 2 Occurrences of extreme precipitation 1 Increased water scarcity 1 Floodplain risk rating 1 Precipitation forecasts 1 Other 15 General increase in volatility of extreme weather events 4 Weather indexing / Extreme weather trending 3 Changes in occurrence of extreme winds, typhoons/hurricanes 2 Changes in wind patterns 2 Climate insurance cost on capital assets 1 Food price index 1 Geologic maps 1 The price of oil 1 Table 9: Climate risk indicators Could you come up with risk categories in which climate risk indicators are, or should be, taken into account? Or do you feel that climate risk indicators should have their own, or no specific risk category? (Question 8) Interviewees responses on this question were most diverse, ranging from those who felt climate risk indicators needed their own category, those who felt they needed their own categories under certain circumstances and those who felt they should be integrated in existing categories or do not need any category existing or new. Page 81 Figure 23: Specific, existing or no risk category It adds more weight if they have their own category. If you add them to other categories it submerges them and you cant see the rogue factor in the category. 299 The value added of having risk categories goes to the monitoring and mitigation of the risks. So being able to separate severe weather from supply or financial viability provides you to understand the different nature of those events. Severe weather you have no control over; its going to happen, probably you only have a few days warning, whereas financial viability there are ways of tracking, working with suppliers and you will probably have several months of warning and there is very different mitigation activities. 300 I think it is a two-sided question. Is it better if you give it a title and you give it visibility as a category in its own right? This can go two ways: They make it a title, they add a Chief Climate Change Officer. That must be important, or it goes like: Well, someone is covering it, so I dont need to look at it or think about it. The Chief Regulations became Chief Sustainability and would then become Chief Climate Change. 301 299 See Interview 9 - Colin Airdrie, Question 8, Annex 5. 300 See Interview 1 Taylor Wilkerson, Question 8, Annex 5. 301 See Interview 2 Steven Dunn, Question 8, Annex 5. 2 3 6 1 Specific category Specific category sometimes In existing category No category Page 82 You need to create urgency, make it visible, give it a title, and you get the right people on the bus before it becomes part of mainstream decision-making. 302 Singling out any kind of category might lead to oversight. 303 If its a separate category that no one understands and no one will actually react on it. In the case of sustainability you see a Chief Sustainability Officer and no one really understands what the person is doing, while sustainability should become an integral part of the organization. 304 It usually makes more sense to integrate them into existing categories, into each one of them where they have an impact, because they then become an integral part of risk management in a supply chain. 305 A choice for certain risk categories should be informed by and concerned with whatever impacts the company. If what they are most concerned about is schedule, then your climate risks should end up in a category that is schedule-related. If it is weather impacting cost of materials, then use your climate risk indicators in a related category. 306 Climate risk indicators should be associated with particular parts of the supply chain, break it down to processes at different levels. You can disaggregate and re-aggregate information up and down the chain and levels, horizontally as well as vertically. 307 Climate risks probably impact almost any category of risks you would come up with, which is why they definitely should not have their own category. 308 Ill use the analogy of a menu in a Chinese restaurant; as you look up and down the menu, in the margins next to 15 to 20 % of the available menu options you will see a marking like a little red hot chili pepper those are the very spicy dishes, beware! It would be useful to indicate which metrics or indicators are climate change sensitive. This would 302 Ibid. 303 See Interview 8 Gyngyi Kovcs, Question 8, Annex 5. 304 Ibid. 305 Ibid. 306 See Interview 3 Kevin Watson, Question 7, Annex 5. 307 See Interview 5 Peter Murray, Question 8, Annex 5. 308 See Interview 10 Michael Keizer, Question 8, Annex 5. Page 83 then imply: Be careful in using these metrics, because you may no longer be able to rely on historical data! 309 I think having separate climate change risk indicators in one category that is kind of to the side, makes it less impactful. For example, if you look at the energy intensity of a supply chain including your suppliers you can aggregate that down to a unit of output, and that is becoming a pretty effective measure tool. If you would separate that measure out as a stand-alone then it would become less effective in doing something about it and it would be less effective in monitoring changes in processes and nodes over time. 310 The question on risk categories has not been further examined in the subsequent internet-mediated questionnaire. The use and value added of specific categories vis--vis integration into existing categories depends on too many factors and one or two closed answer options do not do justice to the complexity. The use of specific climate risk categories depends for example on the level of urgency given to climate risks informed by a supply chain-wide risk analysis, on organization- specific choices made within the organizations SCRMP, and the level of integration of SCRM within the wider organizational risk management system. Further points of discussion I would say that the organizations who have not taken climate risk consequences into account in their risk management yet are pretty late and probably too late. 311 Maybe a companys ERP system can be the climate change risk management vehicle, given it has that interconnectedness, we invested heavily in it already, it would legitimize climate risk management decision-making and perhaps we should model climate change into a companys ERP system. 312 309 See interview 6 Ira Feldman, Question 8, Annex 5. 310 See Interview 5 Peter Murray, Question 6, Annex 5. 311 See Interview 10 Michael Keizer, Question 6, Annex 5. 312 See Interview 2 Steven Dunn, Question 8, Annex 5. Page 84 3.3 Internet-mediated questionnaire The design of the internet-mediated questionnaire was informed by the results of the expert interviews as discussed in Paragraph 3.2 and the research objectives. The questionnaire data was reviewed and analyzed in IBM SPSS Statistics 22 software. 313 This paragraph starts with painting a picture of the 393 questionnaire respondents, personally professionally as well as the type of organization for which and sector in which they are working. This informs and grounds their answers given on those questions that link directly to the research objectives, as shown in Table 7. Skip logic has been used in this questionnaire (see Annex 7). As such not all questions have been answered by all respondents. n will indicate the total number of respondents per question. Questionnaire respondents profile Gender (Question 21, n=393) Figure 24: Questionnaire respondents' gender There is a very positive gender balance in the responses. Given supply and logistics is still a male-dominated field of work, getting 26.2% of the responses from female professionals reflects the growing role of women in supply chain management and logistics. Focusing specifically on the 313 See footnotes 244 and 244. Female: 103 (26.2 %) Male: 290 (73.8 %) Page 84 3.3 Internet-mediated questionnaire The design of the internet-mediated questionnaire was informed by the results of the expert interviews as discussed in Paragraph 3.2 and the research objectives. The questionnaire data was reviewed and analyzed in IBM SPSS Statistics 22 software. 313 This paragraph starts with painting a picture of the 393 questionnaire respondents, personally professionally as well as the type of organization for which and sector in which they are working. This informs and grounds their answers given on those questions that link directly to the research objectives, as shown in Table 7. Skip logic has been used in this questionnaire (see Annex 7). As such not all questions have been answered by all respondents. n will indicate the total number of respondents per question. Questionnaire respondents profile Gender (Question 21, n=393) Figure 24: Questionnaire respondents' gender There is a very positive gender balance in the responses. Given supply and logistics is still a male-dominated field of work, getting 26.2% of the responses from female professionals reflects the growing role of women in supply chain management and logistics. Focusing specifically on the 313 See footnotes 244 and 244. Female: 103 (26.2 %) Male: 290 (73.8 %) Page 84 3.3 Internet-mediated questionnaire The design of the internet-mediated questionnaire was informed by the results of the expert interviews as discussed in Paragraph 3.2 and the research objectives. The questionnaire data was reviewed and analyzed in IBM SPSS Statistics 22 software. 313 This paragraph starts with painting a picture of the 393 questionnaire respondents, personally professionally as well as the type of organization for which and sector in which they are working. This informs and grounds their answers given on those questions that link directly to the research objectives, as shown in Table 7. Skip logic has been used in this questionnaire (see Annex 7). As such not all questions have been answered by all respondents. n will indicate the total number of respondents per question. Questionnaire respondents profile Gender (Question 21, n=393) Figure 24: Questionnaire respondents' gender There is a very positive gender balance in the responses. Given supply and logistics is still a male-dominated field of work, getting 26.2% of the responses from female professionals reflects the growing role of women in supply chain management and logistics. Focusing specifically on the 313 See footnotes 244 and 244. Female: 103 (26.2 %) Male: 290 (73.8 %) Page 85 manufacturing and transport and storage sub-sectors, 25.6% of the responses were from female professionals. The respondents field of work was the focus of Question 22, visualized in Figure 25. With the survey aimed at logistics, supply chain and risk management specialists, a balanced spread can be distinguished in the respondents field of work. 39% of the respondents represent logistics, supply, procurement and sourcing functions, 24% representing risk management, quality, CSR and sustainability and 25% of the respondents have a consulting, advisory role towards these functions. Field of work (Question 22, n=393) Figure 25: Questionnaire respondents' field of work Figure 26 on the next page focuses on the main sector in which the respondents organization operates. It shows a very balanced spread; 38% of the respondents work for private companies, 25% for public organizations either (sub)national or multilateral and inter-governmental, and 24% represent organizations operating in the voluntary, non-profit, non-governmental sector. 13% of the respondents come from the academic, research sector. 26% 13% 8% 8% 8% 3% 9% 25% Supply chain, logistics operations / management Procurement, sourcing or contract management Organizational risk management / Risk management Quality assurance / Quality management Corporate Social Responsibility / Sustainability Financial management / Financial decision-making Academic focus on any of the above fields Consultant / advisory function to any of the above fields Page 86 Sector in which the respondents organization operates (Question 1, n=393) Figure 26: Sector in which the respondents' organization operates Specific sector on which the respondents organization focuses 314 (Question 2, n=393) Figure 27: Specific sector on which the respondents organization focuses 314 The letters are part of the ISIC Rev 4 codes, which are the International Standard Industrial Classification of All Economic Activities, as issued by the United Nations Department of Economic and Social Affairs (UNDESA) - Statistics Division. UNDESA 2008. 38% 13% 12% 24% 13% Private Public (national and sub-national) Public (multilateral, inter- governmental, eg. EU, UN) Voluntary, Non-profit, Non- governmental Academic, Research 8.9% 12.7% 14.8% 9.4% 2.8% 12.5% 2.3% 12.0% 2.3% 2.3% 9.9% 8.9% Z - Aggregration of sectors with < S - Other service activities Q - Human health and social work P - Education O - Public administration and defense M - Professional, scientific and J - Information and communication H - Transportation and storage F - Construction E - Water supply + sewerage, waste C - Manufacturing A - Agriculture, forestry and fishing Page 87 Question 2 focused on the sub-sector in which the respondents organization operates. Voluntary, non-profit and non-governmentals are mainly represented in ISIC codes Q and S, though other service activities also includes private and public service activities. The academia is represented in ISIC code P and academic research is also represented in ISIC code M, though code M also represents R&D in the private sector. Size of the respondents organization (Question 3, n=393) 315 When focusing on risk management in global supply chains a large number of businesses probably represent the small and medium-sized business bracket, though companies in the large and enterprise-size scales do make up for a substantial part of employment. As such, employees in large and enterprise-level companies do represent a considerable number of the total population of those being involved in global supply chains and related risk management, visualized in Figure 28 below. Figure 28: Size of the respondents' organization 315 The EC SME standard sets the European standard for business sizes. See EC 2005. The three official business size standards available are the United States, European Union and the Australian standards on business sizes, for which the European standard was chosen because it formed a happy medium between the Australian (smaller) and American (bigger) business size standards. 13.2% 12.5% 16.5% 15.5% 42.2% Micro (1-9 employees) Small (10-49 employees) Medium (50- 249 employees) Large (250-999) Enterprise (1000 or more) Page 88 Respondents years of experience in the sector currently employed in vs. experience in their specific field of work (Question 23, n=393) The respondents experience in the sector focuses on questionnaire Question 2 (Figure 27) whereas the respondents experience in their field of work focuses on Question 22 (Figure 25). Figure 29: Respondents' years of experience in the sector of employtment Figure 30: Respondents' years of experience in their field of work 0 20 40 60 80 100 # respondents # years experience in the sector mean = 14.08 years 0 20 40 60 80 100 120 # years experience in field of work # respondents mean = 13.1 years Page 89 There is a strong positive correlation between the respondents years of experience in the sector currently employed in versus their experience in their specific field of work; Pearsons r = 0.551. 316 This means that when talking about experience we dont necessarily need to distinguish between whether this is sectoral or field of work experience. Respondents level of responsibility (Question 24, n=393) Given the respondents years of experience the expectation is that a considerable number of respondents will work in higher-level positions, which turns out to be true. 26% works at director-level, 22.4% at senior management level and 27.2% at middle management level. This is represented in Figure 31 below. Figure 31: Respondents' level of responsibility However, there is a moderately negative correlation between the level of responsibility and years of experience in the sector (Pearsons r = -0.384) as well as between the level of responsibility and the years of experience in the respondents field of work (Pearsons r = -0.378). 317 316 Calculated in SPSS 22. Two-tailed Pearsons r. 317 Ibid. 26.0% 22.4% 27.2% 7.9% 16.5% Director-level Senior manager below director level Middle manager Line manager Employee with limited to no managerial responsibility Page 90 A plausible, though not verifiable, explanation would be that those aspiring higher positions move up the ladder through various sectors and job functions, resulting in a lower number of years of experience in one specific sector or field of work. People who do not aspire to climb up to higher management levels are happy within their sector and field of expertise and build up experience within that one sector or field of expertise. Respondents country of employment, country of origin and location of the respondents organizations head office (Questions 25, 26 and 4, n=393) These questions were asked on country-level but aggregated to regional level for the graphical representations on the following pages. The correlations between the answers on the three questions were calculated on country-level. A question could be whether the respondents answers are influenced by and reflect their personal origin, their current work environment or perhaps the business culture of the organizations original location. A strong positive correlation between the three could render that question less important. Figure 32: Respondents' region of employment Region of employment Asia / Australasia 29% Europe 33% Northern America 22% Southern America 4% Africa 12% Page 91 Figure 33: Respondents' region of origin Figure 34: Location of respondents' organization's head office The correlation between the respondents country of origin and employment was very strongly positive (Pearsons r = 0.725). The correlation between the country of origin and the country of the organizations head office (Pearsons r = 0.63) was strongly positive. The correlation between the country of employment and the country of the organizations head office (Pearsons r = 0.811) was also very strongly positive. 318 318 Ibid. Region of origin Asia / Australasia 27% Europe 39% Northern America 21% Southern America 4% Africa 9% Location of head office Asia / Australasia 23% Europe 42% Northern America 25% Southern America 3% Africa 7% Page 92 Risk management and supply chains - verifiers Three questions were asked to verify whether respondents organizations applied a risk management system (Question 5), adhered to a risk management standard (Question 6) and actually operated supply chains (Question 7). Some of the next questions only applied to those who do have a supply chain risk management system in place and/or are actively involved in supply chain operations. Does your organization apply a risk management system? (Question 5, n=393) Answer Options Response % Response # Yes 62.3% 245 No 23.7% 93 I don't know 14.0% 55 Table 10: Application of a risk management system Does your organization adhere to an accredited risk management standard? (Question 6, n=393) Answer Options Response % Response # Yes 23.7% 93 No 46.1% 181 I don't know 30.3% 119 Table 11: Adherence to a risk management standard Page 93 Does your organization apply a supply chain risk management system? (Question 7, n=393) Answer Options Response % Response # Yes - My organization has a supply chain risks management system as an integral part of its enterprise risk management system. 20.9% 82 Yes - My organization has a supply chain risk management system separate from its enterprise risk management 10.4% 41 The respondents above total 123 respondents and they answered specific risk management questions (skip logic was applied) No - My organization is involved in supply chain activities, but has no supply chain specific risk management system 29.0% 114 The respondents above total 237 respondents and they answered specific climate risks and supply chain questions (skip logic was applied) No - My organization does not operate or is not involved in any supply chain activities 22.4% 88 I don't know 17.3% 68 Table 12: Application of a supply chain risk management system Discarding the final two groupings, 123 respondents - being 51.9% - of those operating supply chains, i.e. 237 respondents, do have a supply chain risk management system in place. Supply chains and climate risk events Research Objective 1. To identify whether supply chains have been more than marginally impacted by physical climate change and extreme weather events over the past three years. Page 94 Supply chains in general have been more than marginally impacted by physical climate change and extreme weather events over the past three years (Question 12, n=237) Figure 35: Likert scale on supply chains in general having been more than marginally impacted by climate risk events over the past 3 years Respondents are clear that supply chains in general have been more than marginally impacted by physical climate change and extreme weather events over the past 3 years with 71% agreeing or strongly agreeing, and only 16% disagreeing or strongly disagreeing with the statement. 319 Figure 36: Has your organization's supply chain been more than marginally impacted by a climate risk event over the past 3 years? 319 Please note that the aim of this research is not to conclude whether short term extreme weather events can be explained by long term climate change! Both physical climate change as well as extreme weather events are regarded as climate risk events, without aiming to derive any conclusions regarding the causal relationship between extreme weather events and climate change. 3% 13% 14% 50% 21% 39.7% 44.3% 16.0% Yes No I don't know Page 95 39.7% - 94 respondents - indicated that their own supply chain has been impacted by climate risk events over the past 3 years (Question 13, n=237), visualized in Figure 36 on the previous page. Of those whose own supply chain has been impacted, 93.6% agrees to strongly agrees that supply chains in general have been more than marginally impacted by climate risk events over the past three years. Question 14 (n=94) subsequently asked those respondents whose supply chain had been impacted about the type of climate risk event that impacted their supply chain, visualized in Figure 37 below. Figure 37: Climate risk events that more than marginally impacted supply chains The climate risk event that most impacted their supply chain was flooding (31.9%), followed by hurricane / cyclone / typhoon (28.7%), drought (11.7%) and extreme precipitation / monsoon (8.5%). The climate risks least impacting their supply chains were global sea level rise (0%), global temperature increase (2.1%) and the occurrence of tsunamis (2.1%). It becomes clear that over the past three years it were 0.0% 2.1% 2.1% 3.2% 4.3% 7.4% 8.5% 11.7% 28.7% 31.9% Global sea-level rise Tsunami Global temperature increase Heat wave Cold wave Blizzard / Snowstorm Extreme precipitation / Monsoon Drought Hurricane / Cyclone / Typhoon Flooding Page 96 not climate change related climate risks or tsunamis, but extreme weather related climate risks that impacted supply chains. It should be noted that the type of climate risk impacting supply chains is influenced by the specific climatic and geographical circumstances of those locations in which the organization operates its supply chains, which means that this information cannot be easily generalized towards global supply chains. Respondents filled out the questionnaire looking at the supply chain element on which they focus. Local circumstances at the disaggregation level of supply chain nodes and linkages, processes and streams need to be analyzed to come to conclusions about the entire chain and its vulnerability to specific climate risks. Extent of negative consequences Research Objective 2. To identify the perceived extent of negative consequences of climate risk events on the supply chains impacted. Question 15 asked those respondents whose supply chain had been impacted (n=94) about how they would rate the impact of the climate risk event, visualized in Figure 38. Figure 38: Perceived impact of the climate risk event Subsequently in Question 16 (n=94) the same respondents were asked how they would rate the impact in the light of their companys risk appetite, displayed in Figure 39 on the following page. 1%12% 40% 35% 12% Page 97 Figure 39: Impact of the climate risk event related to the company's risk appetite While 47% rates the impact of the climate risk event impacting their supply chain as either severe or critical, in the light of their companys risk appetite only 23.4% describes the climate risk event as being unacceptable. Question 15 provided the option to explain why respondents would rate the perceived impact of climate risk events the way they did. Those rating the impact as severe or critical talk about floods inundating nodes, events impacting production for 2 months, goods being stuck for prolonged periods of time, severe physical impediments, damaged infrastructure, interruption of raw material supplies and total recovery after a climate risk event taking at times up to a year. But the same respondents also comment that as we have operations in many countries, the overall impact has been manageable and despite the impact being grave, these were insured / insurable losses. Question 17 (n=94), visualized in Figure 40 on the following page, asked respondents to select up to 4 indicators best measuring the impact of the climate risk event. The indicators selected present a mix of time and cost- related indicators, with those chosen most being time-related. This differs from the expert panel interview results (See Table 8), where cost-related indicators were favoured. 18.1% 58.5% 23.4% Acceptable Tolerable Unacceptable Page 98 Indicators on the impact of climate risk events (Question 17, n=94) Figure 40: Preferred climate risk impact indicators 5.3% 6.4% 6.4% 10.6% 11.7% 12.8% 13.8% 14.9% 16.0% 18.1% 18.1% 22.3% 27.7% 28.7% 30.9% 34.0% 38.3% 44.7% COST: Loss of market share / decline in stock value OTHER: No service provision all together OTHER: Exacerbation of natural resource shortages COST: Value of production / cargo lost COST: Increase in insurance premiums OTHER: Loss of life OTHER: Employee safety COST: Lost revenue as % of total revenue COST: Cost of supplier base issues OTHER: Trust, reputational and social consequences OTHER: Efficiency of response / responsiveness COST: Demand / customer-base related cost TIME: Time to recover COST: Cost of substitution or alternatives / Flexibility cost COST: Value of damage to facilities / assets COST: Lost profit or lost revenue TIME: Product lead time / schedule consequences / delivery delay TIME: Time lost during climate risk event = TIME = COST = OTHER Page 99 Climate risks and risk indicators Research Objective 3. To identify the climate risks, risk indicators and related risk categories used in companies Supply Chain Risk Management Processes (SCRMP). Figure 37 (Question 14) already presented the climate risk events that most impacted respondents supply chain over the past three years, being flooding (31.9%), followed by hurricane / cyclone / typhoon (28.7%), drought (11.7%), extreme precipitation / monsoon (8.5%) and blizzard / snowstorm (7.4%). Climate change related risk events and tsunamis were indicated as climate risk events least impacting their supply chains. While Question 14 focused on past events, Question 19 (n=237) asked What, in your view, is the likelihood of your organizations supply chain getting more than marginally impacted by the following climate risk events over the coming three years?, visualized in Figure 41 on the next page. On average the likelihood of respondents organizations supply chain being impacted by climate risk events is indicated to be as likely as unlikely over the coming three years, corresponding with a likelihood scale between 33 and 66%. 320 This result is very much in line with the historical picture painted in Question 12, with 71% agreeing or strongly agreeing that supply chains in general have been more than marginally impacted by climate risk events over the past 3 years, and with the response on Question 13 with 39.7% indicating that their own supply chain has been impacted by climate risk events over the past 3 years. Zooming in on specific climate risk events; Flooding is seen as the most likely event, with 48% identifying it as likely to virtually certain their supply chain will be impacted by flooding in the next three years. Extreme precipitation is the second-most likely event (38%) and hurricanes / typhoons / cyclones being the third-most likely event (35%). 321 320 The question made use of a 7-point likelihood ordinal answer scale, based on the likelihood standards as used in IPPC 2007a and 2007b. Given the answer options ranging from exceptionally unlikely (1) to exceptionally likely (7) and the answer median being 3.31, the only conclusion can be that 3.31 falls within the middle category as likely as not likely. A conclusion that the likelihood of being impacted by a climate risk event is rated at 3.31/7 = 47.6% would be premature. 321 The categories likely to virtually certain represent a likelihood between 66% and 100% Page 100 Figure 41: Perceived likelihood of future climate risk events impacting respondents' supply chains over the coming three years 38% 29% 22% 30% 19% 21% 24% 21% 16% 8% 15% 19% 19% 14% 18% 15% 12% 14% 18% 12% 20% 16% 22% 15% 23% 18% 13% 16% 15% 15% 12% 11% 16% 16% 13% 16% 16% 15% 14% 16% 8% 16% 15% 11% 17% 15% 20% 18% 18% 22% 5% 6% 5% 10% 8% 11% 10% 11% 13% 18% 3% 3% 3% 5% 2% 5% 5% 6% 7% 8% Exceptionally unlikely (<1%) Very unlikely (<10%) Unlikely (<33%) About as likely as unlikely (33-66%) Likely (>66%) Very likely (>90%) Virtually certain (>99%) Flooding Hurricane / Cyclone / Typhoon Extreme precipitation / Monsoon Global temperature increase Heat wave Drought Global sea- level rise Cold wave Tsunami Blizzard / Snowstorm Page 101 The climate risk events indicated to be unlikely to exceptionally unlikely are tsunamis (73%), blizzards / snowstorms (64%) and cold waves (63%). 322 Interestingly enough the climate change-related risk events of global temperature increase and global sea level rise are not seen as the most unlikely events. This is rather curious, given that climate change risk events have a longer term impact and the question referred to the likelihood of climate risk events maturing and impacting supply chains over the coming three years. It might be, though this is speculation, that respondents see these climate change events as instigators of certain extreme weather events, viz. global temperature increase as an instigator of droughts and global sea level rise as an instigator of flooding in coastal areas. In Paragraph 1.7 on indicators it was already indicated that climate risks need to be operationalized by examining past climate risk sources and events, current trends and future climate risk projections in the light of supply chain vulnerabilities. The aim of this research study was not to develop climate risk indicators, but to identify climate risk indicators and related risk categories to be used in companies Supply Chain Risk Management Process (SCRMP). It should be noted that apart from climate risk sources, risk sources on all operational levels having the potential to ameliorate climate risk consequences. Question 20 (n=237) asked respondents which indicators they would monitor in order to predict the development of climate risk events possibly impacting your organization's supply chain. Up to 3 indicators could be chosen. Respondents choose a mix of past, present and future, leading and lagging indicators. Changes in wind patterns as indicator was perceived least useful (5.6%) for climate risk prediction. Respondents are also not that interested in rising sea levels (13.3%), but the longer term temperature changes indicator, a climate change focused indicator, is more often added to their set of risk indicators (24%). 322 The categories unlikely to exceptionally unlikely represent a likelihood between 33% and 0%. Page 102 Indicators on climate risk prediction (Question 20, n=237) Figure 42: Preferred climate risk prediction indicators Climate risk analysis Research Objective 4. To analyze climate risks by identifying their consequence severity, risk likelihood, levels of risk exposure and thus risk ranking. 5.6% 13.3% 14.2% 17.2% 19.3% 20.2% 20.6% 23.2% 24.0% 27.0% 32.2% 39.5% Changes in wind patterns Rising sea levels Climate insurance cost on capital assets Changes in precipitation level Increased water scarcity Changes in precipitation intensity Floodplain risk rating Short term temperature changes / forecasts Long term temperature changes Changes in water/drought conditions Weather indexing / Extreme weather trending Occurrences of extreme weather events Page 103 Going back to Question 15 and looking at those climate risk events that most impacted supply chains in the past three years, visible in Figure 43, the impact rating for floods (median=3.42) and hurricanes / cyclones / typhoons (median= 3.52) is closely following the picture presented earlier for the total value of climate risk events having impacted supply chains over the past three years (median=3.44). Droughts are seen as more critical with a median of 3.73, but the low number of respondents experiencing this climate risk event might influence the accuracy of this result. 323 There is a moderate positive correlation (Pearsons r = 0.334) between the perceived impact of climate risk events (Question 15) and the perceived impact in the light of the organizations risk appetite (Question 16), i.e. more severe impacts are generally less acceptable. 324 Figure 43: Perceived impact of the top 3 climate risk events Making a split-up for the organizations risk appetite (Question 16) for flooding and hurricanes / cyclones / typhoons, visualized on the next page in Figure 44, those groupings of risk events are seen equally unacceptable as the total for climate risk events. However, when looking at what is seen as acceptable, there is more of a risk appetite for hurricanes. 323 The impact was rated on a scale from negligible (1) to critical (5). 324 Calculated in SPSS 22. Two-tailed Pearsons r. 4% 1% 11% 16% 12% 36% 41% 32% 40% 55% 19% 45% 35% 9% 26% 6% 12% Climate risks total (n=94) Floods (n=31) Hurricanes /... (n=27) Drought (n=11) Page 104 Figure 44: Impact of climate risk events related to the company's risk appetite Question 19 looked at the perceived likelihood of various climate risk events impacting respondents supply chains over the coming three years. When looking at the answers of those respondents who have already been impacted by a specific climate risk event in the past it becomes clear that these respondents are much more critical about a similar event happening in the future. Those who have been impacted by flooding in the past rate the likelihood of floods occurring in the future considerably higher, visible in Figure 45. The same picture - though even more pronounced - is visible in Figure 46; those who have been impacted by hurricanes, cyclones or typhoons in the past perceive the likelihood of it happening again in the future considerably higher than those respondents who have not been impacted by such an event in the past. 18.1 % 58.5 % 23.4 % Climate risk events total 6.5% 67.7 % 25.8 % Flooding 22.2% 51.9% 25.9% Acceptable Tolerable Unacceptable Hurricane / Cyclone / Typhoon Page 105 Figure 45: Differences in flooding likelihood perception Figure 46: Differences in hurricane / cyclone / typhoon likelihood perception It was already concluded that those who have personally experienced a certain risk event in the past tend to be more realistic in their risk perception. 325 The conclusion is that the perceived likelihood of future climate risk events in Figure 41 is under-estimated and the actual likelihood of such events occurring will probably be higher as in Figures 45 and 46. 325 See footnote 179. 8.4%11.8% 6.5% 15.2% 6.5% 15.6% 16.1% 22.4% 22.6% 18.1% 32.3% 8.4% 16.1% Very unlikely (<10%) Unlikely (<33%) About as likely as unlikely (33-66%) Likely (>66%) Very likely (>90%) Virtually certain (>99%) Likelihood of flooding (n=237, median=4.2 on a 1-7 scale) Likelihood of flooding, rated by those who have been flooded in the past (n=31, median=5.2 on a 1-7 scale) Exceptionally unlikely (<1%) 20.7% 7.4% 13.5% 3.7% 16.0% 3.7% 14.8% 22.2% 18.1% 7.4% 10.5% 18.5% 6.3% 37.0% Very unlikely (<10%) Unlikely (<33%) About as likely as unlikely (33-66%) Likely (>66%) Very likely (>90%) Virtually certain (>99%) Likelihood of hurricanes / cyclones / typhoons (n=237, median=3.5 on a 1-7 scale) Likelihood of hurricanes, rated by those who have been hit by one in the past (n=27, median=5.2 on a 1-7 scale) Exceptionally unlikely (<1%) Page 106 Climate risk management Research Objective 5. To make recommendations on implementing this information into the SCRMP. Recommendations will be made in Chapter 5, but it is good to analyze the type of risk treatment actions pursued by those impacted in the past by climate risk events. Question 18 (n=94) dealt with the type of risk treatment to tackle the impact of a past climate risk event and the respondent could choose 2 risk treatment options. Contingency planning is not surprisingly the first risk treatment option chosen (54.3%). Crisis management is the second treatment option (26.6%), followed by risk pooling (22.3%), risk adaptation (22.3%) and risk mitigation (19.2%). Figure 47: Types of risk treatment options used 4.3% 6.4% 7.4% 19.1% 22.3% 22.3% 26.6% 54.3% Operational risk avoidance - Cancelling activities or outsourcing to not have to deal with it Do nothing - no actions were put in place Financial risk transfer hedging / mitigation - Any type of risk insurance or financial action Operational risk mitigation - A process aimed at decreasing risk exposure to climate risk events Operational risk adaptation - A process aimed at decreasing sensitivity to climate risk events Operational risk pooling - Operational collaboration towards coping with such types of risks Crisis management - after-the-fact Contingency planning / Business continuity planning - before-the- fact Page 107 Figure 48 presents the top 5 risk treatment options chosen by those impacted by a flood (n=31), with in red the total values from Figure 47. Figure 48: Types of risk treatment options used when flood impacted Figure 47 presents the top 5 risk treatment options chosen by those impacted by a hurricane (n=27), with in red the total values from Figure 47. Figure 49: Types of risk treatment options used when hit by a hurricane 16.1% 19.4% 22.6% 22.6% 64.5% Operational risk pooling - Operational collaboration towards coping with such types of risks Operational risk mitigation - A process aimed at decreasing risk exposure to climate risk events Crisis management - after-the-fact Operational risk adaptation - A process aimed at decreasing sensitivity to climate risk events Contingency planning / Business continuity planning - before-the-fact 14.8% 14.8% 18.5% 25.9% 66.7% Operational risk mitigation - A process aimed at decreasing risk exposure to climate risk events Operational risk adaptation - A process aimed at decreasing sensitivity to climate risk events Crisis management - after-the-fact Operational risk pooling - Operational collaboration towards coping with such types of risks Contingency planning / Business continuity planning - before-the-fact Page 108 It becomes clear that those respondents impacted by floods and hurricanes put more focus on contingency planning and pre-incident preparation. Climate risk management decision-making Research Objective 6. To describe how this can inform management decision-making to improve supply chain resilience. Question 8 to 11 (n=237) presented the respondents with four statement on their perceived level of influence on risk management and related decision making, presented in Figure 50. People felt generally empowered regarding their influence and level of authority towards their organizations risk management and related decision making. Figure 50: Perceived level of influence on risk management decision-making 7% 11% 6% 12% 16% 20% 11% 13% 19% 20% 23% 19% 47% 38% 46% 43% 11% 11% 15% 13% ...influence company policy on risk management. ...make influential recommendations on risk management. ...make changes to risk indicators in our risk management processes. ...make decisions based on risk reports. I have the authority to.... Strongly disagree Agree Strongly agree Disagree Agree nor disagree Page 109 With a Cronbachs Alpha of 0.901, 326 indicating an excellent internal consistency, all four questions reliably measure the latent variable of respondents feeling empowered to influence and use their organizations risk management systems and processes. The findings for all four questions are very similar when focusing on those respondents that have been impacted by climate risk events in the past. The same is true for the answers to all four questions for those respondents with more than 10 years experience vis--vis de more junior respondents. Director- and senior-level respondents feel generally more empowered to influence their organizations risk management systems and processes. 80% of all directors and senior managers agree to strongly agree they have the authority to influence their companys risk management policy, compared to 36.8% of respondents in positions below senior level. 75.4% of all directors and senior managers agree to strongly agree they have the authority to make decisions based on risk reports, compared to 44.1% of respondents in positions below senior level. 3.4 Summarizing the results per research objective Research Objective 1. To identify whether supply chains have been more than marginally impacted by physical climate change and extreme weather events over the past three years. The expert panel agrees unanimously that supply chains have been more than marginally impacted by extreme weather events over the past three years, though there is some disagreement on the climate change element. Climate change is a longer term trend, changes are slow and incremental and supply chain management generally takes a shorter timeframe perspective. Extreme weather risk sources should be the focus of supply chain risk management, and, for some, whether these risks originate out of climate change is to some extent irrelevant towards their risk management. 71% of the questionnaire respondents agree to strongly agree that supply chains have been more than marginally impacted by climate risk events 326 Calculated in SPSS 22. Page 110 over the past three years. When focusing on those respondents whose own supply chain has been impacted by climate risk events over these three years, 93.6% agrees to strongly agrees that supply chains have been more than marginally impacted by climate risk events. The climate risk event that most impacted their supply chain was flooding (31.9%), followed by hurricane / cyclone / typhoon (28.7%), drought (11.7%) and extreme precipitation / monsoon (8.5%). The climate risks least impacting their supply chains were global sea level rise (0%), global temperature increase (2.1%) and the occurrence of tsunamis (2.1%). It becomes clear that it were not climate change related climate risks or tsunamis, but extreme weather related risks that impacted supply chains. Research Objective 2. To identify the perceived extent of negative consequences of climate risk events on the supply chains impacted. The expert panel unanimously agrees that climate risks consequences on supply chains should be of a growing concern. Their quantification of climate risk consequences focuses to an important extent on cost-elements; no one cares until your bottom line is being impacted. 327 A very precise level of measurement is regarded as meaningless in relation to the high level of unknowns related to these types of risk events. There is no universal rating for negative consequences of climate risk events; what is regarded as disastrous to one company or sector might have little to no impact on another. Questionnaire respondents focusing in their quantification of climate risk consequences on a more equal mix of cost- and time-indicators. 47% of the questionnaire respondents whose supply chains had been impacted in the past rated the impact as severe to critical. Though in the light of their organizations risk appetite, only 23.4% rated the impact as unacceptable; 58.5% rated it as tolerable and 18.1% as acceptable. Explanations provided towards their risk appetite focused on the fact that the overall impact is manageable when impacted operations are shifted to other countries in which the organization operates and climate risk consequences were also seen as insured or insurable losses. 327 See footnote 274. Page 111 Research Objective 3. To identify the climate risks, risk indicators and related risk categories used in companies Supply Chain Risk Management Processes (SCRMP). On average the likelihood of questionnaire respondents organizations supply chain being impacted by climate risk events is indicated to be as likely as unlikely over the coming three years. Flooding is seen as the most likely climate risk event, with 48% identifying it as likely to virtually certain their supply chain will be impacted by flooding in the next three years. Extreme precipitation is the second-most likely event (38%) and hurricanes / typhoons / cyclones the third-most likely (35%). Climate change-related risk events of global temperature increase and global sea level rise are not seen as the most unlikely events. It might be, though this is speculation, that respondents see these climate change events as instigators of certain extreme weather risk events. Climate risk indicators The expert panel interviews showed that indicators need to be very much localized, focusing on the place-based risks and micro-climates in which the supply chain is operated. As with indicators on risk consequences, climate risk indicators also depend on the organizations and sectors contextuality. When respondents were asked which indicators they would monitor in order to predict the development of climate risk events they choose a mix of past, present and future, leading and lagging indicators. The longer term climate change related indicators are given a low level of importance by the expert panel as well as the questionnaire respondents. Risk categories The expert panel had very diverse views on risk categories, ranging from those who felt climate risks and related indicators needed their own category, those who felt they needed their own category under certain circumstances and those who felt climate risk indicators should be integrated in existing categories or do not need any category existing or new. Page 112 The question on risk categories was not further examined in the questionnaire, given the use and value added of specific categories vis--vis integration into existing categories depends on too many factors. It depends for example on the level of urgency given to climate risks informed by a supply chain-wide risk analysis, on organization-specific choices made within the organizations SCRMP, and the level of integration of SCRM within the wider organizational risk management system. Research Objective 4. To analyze climate risks by identifying their consequence severity, risk likelihood, levels of risk exposure and thus risk ranking. Flooding, extreme precipitation and hurricanes / typhoons / cyclones are seen as the three most likely climate risk events impacting supply chains over the coming three years. Climate risk events with more severe impact are generally seen as less acceptable in the light of an organizations risk appetite. When comparing flooding and hurricanes / cyclones / typhoons there is more of a risk appetite for hurricanes, rating them as more acceptable climate risk events. Those who have been impacted by flooding in the past rate the likelihood of floods occurring in the future considerably higher. The same picture - though even more pronounced - appears for hurricanes; those who have been impacted by hurricanes, cyclones or typhoons in the past perceive the likelihood of it happening again in the future considerably higher than those who have not been impacted by such an event in the past. Those who have had past risk exposure tend to be more realistic in their risk perception. The conclusion is that the perceived likelihood of future climate risk events is under-estimated by those who have not been affected by climate risk events in the past and the actual likelihood of such events occurring will probably be higher than their estimate. Page 113 Research Objective 5. To make recommendations on implementing this information into the SCRMP. When looking at risk treatment options, contingency planning is not surprisingly the first risk treatment option chosen (54.3%). Crisis management is the second treatment option (26.6%), followed by risk pooling (22.3%), risk adaptation (22.3%) and risk mitigation (19.2%). It becomes clear that those that have been impacted by floods and hurricanes put more focus on contingency planning and pre-incident preparation, rather than focusing on post event crisis management. Research Objective 6. To describe how this can inform management decision-making to improve supply chain resilience. When looking at the questionnaire respondents perceived level of influence on risk management and related decision making, people felt generally empowered regarding their influence and level of authority towards their organizations risk management and related decision making. Though respondents in positions with more responsibility, i.e. director- and senior- management level positions, felt more empowered to influence their organizations risk management and decision making than those in lower- level positions. Respondents who have been impacted by climate risk events in the past feel equally empowered to influence and use their organizations risk management systems and processes as those who have not been impacted by climate risk events in the past. Page 114 CHAPTER 4 DISCUSSION AND REFLECTION 4.1 Introduction Projecting earlier quoted statements by James lovelock and Niels Bohr 328 onto the data analysis findings, a conclusion would be that predictions about future climate risks and especially climate impacts are inherently difficult and complex due to human factors interceding with climatic risk sources. 329 4.2 Critical analysis towards the research objectives Research Objective 1 has been conclusively answered. Supply chains have been more than marginally impacted by climate risk events over the past three years. Due to the context-specific climatic and geographical circumstances of climate risk events it is hard to say whether that always impacted global supply chains. Deductive reasoning however and examples presented, like the Thailand floods, hurricanes Sandy and Katrina, etc. lead to the conclusion that localized events have impacted regional as well as global supply chains. Any climatic event will have an impact on supply chains, particularly in an era in which we are moving towards leaner supply chains with less inventory held in different points within the supply chain. 330 The trend of lean and JIT has, in that sense, perhaps gone too far. Data also shows that there has been a constant growth in the yearly number of natural catastrophes over the past 40+ years 331 and, though not presenting a conclusive pattern, cost per natural catastrophe has been rising over recent years 332 . The expectation was that the perceived negative consequences in Research Objective 2 could be quantified in monetary values, though developing universal financial ratings to quantify the negative consequences of climate 328 See footnotes 1, 291 and 291. 329 See footnotes 36, 37 and 40. 330 See footnotes 38, 262 and 278. 331 See footnotes 113 and 116. 332 See footnotes 119, 120 and 121. Page 115 risk events turned out to be inappropriate; what is regarded as disastrous to one company or sector might have little to no impact on another. 333 The identification of climate risks and climate risk indicators in Research Objective 3 resulted in satisfactory answers. Respondents preferred a mix of cost, time and social indicators though the appropriateness of specific risk indicators and the focus on particular climate risks depend very much on the individual company, the sector in which it operates and the operational, geographic and climatic contexts in which its supply chains function. 334 It should be noted that apart from climate risk sources, non-climatic risk sources on all operational levels have the potential to ameliorate climate risk consequences and vice-versa climate risks also potentially influence the impact of other non-climatic risk sources. 335 Expert panel interviews showed that the use and value added of specific risk categories for climate risk events vis--vis integration into existing categories depends on too many factors 336 and the research element of risk categories was not further pursued in the internet-mediated questionnaire. Looking at Research Objective 4 it is clear that hurricanes / typhoons / cyclones and flooding are seen as the most likely climate risk events impacting supply chains over the coming three years, 337 but at the same time there is more of a risk appetite for hurricanes / typhoons / cyclones over flooding. 338 Based on the data it is hard to develop a risk ranking, given it is not simply the sum of consequence severity and risk likelihood. Moreover, risk rankings need to be developed for specific supply chain nodes and linkages to identify the appropriate risk management approach. The statistical analysis of questionnaire data in the previous chapter consisted of mostly descriptive as well as some inferential analysis elements in support of answering the research objectives. 333 See footnotes 296 and 297. 334 See footnotes 136, 282, 294 and 296. 335 See footnotes 102, 103, 123 and Annex 2. 336 See footnotes 299 to 310. 337 See Figure 41. 338 See Figure 44. Page 116 Looking at the dataset of 393 responses, it would have been interesting to examine the use of multivariate statistics analysis techniques like principal component analysis, exploratory factor analysis and/or discriminant function analysis. The two main reasons not to use multivariate statistics were first of all time constraints. Secondly it was questionable whether this level of deepened analysis would result in new findings towards the research objectives. It is planned to do a deepened analysis later, when developing an article for a peer-reviewed journal on the researchs findings. The macro level overarching scope of this research has been great to develop a sense of direction and perspective towards climate risk management in supply chains. However, SCRMP should focus on the contextual elements of nodes and linkages that constitute a supply chain. This research provides general direction on what to include and think about when developing climate-specific supply chain risk elements, but it does not provide recommendations that can be readily applied onto one specific supply chain. 4.3 Critical analysis towards the research design The non-randomized sampling method 339 used for the questionnaire was not ideal, but given the lack of clear population figures and time constraints it was one of the research design choices made. Looking at the level of respondents experience there seems to be skewness towards the 1-10 years experience bracket. 340 This skewness could be explained by climate risk management being a relatively new field and as such the data does represent the wider population. Or the skewness is because the internet-mediated questionnaire attracts more technical savvy and often younger professionals. Without clear population data it is hard to predict the extent to which the sample represents a population, which does impact the findings generalizability. 341 339 See Paragraph 2.4. 340 See Figure 29 and 30. 341 See Paragraph 2.7. Page 117 The climate change-related risk events of global temperature increase and global sea level rise are not seen as the most unlikely climate risk events to mature over the next three years. 342 It might be that respondents see these events as instigators of certain extreme weather events. Equally plausible is the explanation that snowball sampling resulted in an over- representation of respondents predisposed to a concern about climate change. Control statements that were part of the initial questionnaire design were taken out, because they would not provide conclusive evidence of non- response bias 343 . And having specific climate change statements in the questionnaire could also result in response/social-desirability 344 or order- effect 345 bias developing. The expert panel was used as an independent third party to check whether sufficient efforts had been made to guarantee validity and reliability; given conclusions on ones own research bias are often not the most objective. 346 342 See Figure 41. 343 See footnote 247. 344 See footnotes 228 and 229. 345 See footnote 231. 346 Hansen et al. 2014. Page 118 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusions towards the research objectives It is true that 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. 347 The trend towards lean and JIT from a supply chain efficiency perspective has perhaps gone too far and might result in inefficiencies in other areas, for example in risk and business continuity management. The high levels of uncertainty of occurrence and impact of climate risk events make it hard for managers to guide their organization to take appropriate action. We should not be holding ourselves back by trying to come to the best description of risk management, 348 or the most perfect set of indicators. 349 The process of risk assessment is clear 350 and the focus should be on those risk sources relevant to your particular supply chain context. It was Robert W. Kates 351 who first stated that the problem is not to cope with any of these [environmental] hazards, but the issue is that it may be impossible to cope successfully with all of them. 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. 352 While the likelihood of any one event that would have an impact on any one facility or supplier is small, the collective chance that some part of the supply chain will face some type of disruption is high. 353 347 See footnote 36. 348 See footnote 72 349 See Paragraph 1.7. 350 See footnote 77. 351 Kates 1978. 352 See footnote 81. 353 See footnote 127. Page 119 Current-day increased human-nature inter-connectivity in the natural environment makes that climate risk events will always have some component of human origin. 354 And 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 and vulnerabilities. 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. 355 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. 356 Yes, climate risk events should be of growing concern. Natural catastrophic events have been on the rise since 1970, 357 for the last three years there have been more natural risk events than man-made ones, 358 the average economic loss per event is on the rise 359 and 71% of the questionnaire respondents agree to strongly agree that supply chains have been more than marginally impacted by climate risk events over the past three years. Climate risks pose place-based risks, i.e. exact geographic locale is of importance, 360 more than a high level of accuracy regarding risk likelihood predictions. 361 For example, it is much more useful to know with 80% certainty that your distribution centre is in the path of a hurricane making landfall tomorrow or the day after, than knowing with 99.9% certainty that a hurricane will make landfall tomorrow somewhere on a 50 kilometre coastline. Risk indicators have been discussed in Paragraph 1.7, examples of climate risk impact/consequences indicators can be found in Table 8 and Figure 40. Examples of climate risk likelihood indicators are presented in Table 9 and Figure 42. 354 See footnote 94. 355 See footnote 102. 356 See footnotes 102 and 103. 357 See footnote 116. 358 See footnote 114. 359 See footnotes 119, 120 and 121. 360 See footnotes 294, 295 and 296. 361 See footnotes 275. Page 120 Very few management decision-making situations are taking place with perfect information. This certainly holds true for climate risk events; The probability of occurrence of longer-term continued climatic change is very likely to be virtually certain, 362 what is lacking is a high level of certainty regarding the increasing frequency and intensity of extreme weather events for specific locations in which organizations operate. 363 It was assumed that risk management information should always instigate pre-incident management decision-making. It turns out that pre-incident decision-making more often than expected 364 focuses on post-incident risk management. Companies 365 and individuals 366 seem to be more realistic and take more realistic risk management approaches towards experienced risks rather than expected risks. But it is a sit and wait adaptation strategy 367 that will eventually result in a negative climate risk experience. With the increasing occurrence of climate risk events and more being known about their potential risk consequences, proactive adaptation strategies and contingency planning should be sought. From a practical risk management point of view the climate change discussion displays a longer term development and extreme weather events are what need to be managed in the short term. 368 Whether these events and climate change have a causal link, are anthropogenic or a natural cycle is to some extent irrelevant from a risk management perspective. 369 From a strategic perspective companies need to look at supply chain risk management more holistically, accept that climate risks are intertwined with a multitude of other risk and non-risk factors impacting supply chains 370 and related risk management; the trend for leaner supply chains being one of these non-risk factors with a clear trade-off towards (climate) risk management. 371 362 See footnote 154. 363 See footnote 155. 364 See Figure 47. 365 See footnote 159. 366 See footnotes 179 and 180. 367 See footnote 156. 368 See footnotes 260, 262, 264 and 297. 369 See footnote 261. 370 See footnote 296. 371 See footnotes 277 and 278. Page 121 5.2 Impact of the study The aim of this research was to add to the body of knowledge on supply chain risk assessment from a climate risk perspective and complement the existing research on supply chain risk management (SCRM) indicators and risk assessment. The findings might be useful in the development of future SCRM frameworks. Information on risk likelihood and impact indicators could support a more streamlined integration of climate risk indicators in SCRMPs. Senior management can use the outcome of this research to inform their SCRM and related decision making towards supply chain resilience. It would be interesting to use the findings in a case study focusing on one supply chain impacted by climate risk events in the past. Another intriguing possibility for future research would be to execute a similar questionnaire within one global company, like Unilever, in which the researchs population would be known, improving generalizability, and findings would be more readily applicable. 5.3 Recommendations for future research The interaction between different types of risk sources climatic as well as non-climatic risk sources was not part of this study, but the interaction between different risk sources 372 or between risks on the different levels 373 at which supply chains operate would make an interesting topic for a scenario analysis or case study. Climate risk insurance cost was seen as an indicator of climate risk impact as well as a predictive indicator for the likelihood of climate risk events occurring. Areas with higher climate risk insurance premiums are seen as areas more likely to be hit by climate risks events as well as areas where climate risk events are expected to have a higher impact compared to areas with lower climate risk insurance premiums. 372 See Figure 12 and footnote 123. 373 See Figure 7 and footnote 102. Page 122 The interface between climate risk insurance premiums, risk likelihood and climate risk impact is an interesting one, but no causal relations can be distinguished on the basis of this researchs data. The area of climate risk insurance premiums, likelihood and impact of climate risk events and related organizational decision-making on risk insurance is worth exploring in future research. Another topic for future research relates to the use of sustainability and resilience titles in companies, like Chief Sustainability Officer or Chief Climate Change Officer. 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A model for supply chains environmental performance analysis and decision making. Journal of Cleaner Production, 16(15), pp. 1647-1657. Page 156 WAGNER, S.M. and NESHAT, N., 2010. Assessing the vulnerability of supply chains using graph theory. International Journal of Production Economics, 126(1), pp. 121-129. WEELE, VAN A.J., 2009. Purchasing and supply chain management: Analyis, strategy, planning and practice. 5 th ed. London, United Kingdom: Thomson Learning. Page 157 ANNEX 1: Members of the research expert panel An expert panel was developed for reflection during data collection, development of research datasets and subsequent data analysis. The expert panel consisted of the following members: Colin Airdrie (Mr.), Managing Director of LBA (Logistics Bureau Asia) Consulting Ltd. Bangkok, Thailand. Prof. Gyngyi Kovcs (Ms.), Erkko Professor in Humanitarian Logistics at Hanken University Helsinki, Finland, and Director of the Humanitarian Logistics and Supply Chain Research Institute (HUMLOG Institute). Ira Feldman (Mr.), President & Senior Counsel with Greentrack Strategies Bethesda, United States. J. Kevin Watson, Ph.D., PE (Mr.), takes part in the panel as independent subject matter expert on the topics of Life Cycle Logistics and Supply Chain Management. He works at NASAs Logistics Division, NASA Headquarters Washington DC, United States. Joyce Coffee (Ms.), Managing Director of the Notre Dame University Global Adaptation Index (ND-GAIN) at the Environmental Change Initiative, University of Notre Dame Chicago, United States. Dr. Laura Birou (Ms.), Associate Professor Department of Management and Information Systems, Louisiana Tech University and Director of North America at International Institute for Advanced Purchasing and Supply United States. Michael Keizer (Mr.), Consultant Logistics for Global Health and Aid with, among others, The Global Fund Melbourne, Australia. Nancy Gillis (Ms.), Senior Manager Sustainable Procurement, Supply Chains and System Dynamics, Ernst and Young Washington DC, United States. Page 158 Peter Jones (Mr.), Managing Director, Logistics Learning Alliance Ltd (LLA) Leicester, United Kingdom. Peter Murray (Mr.), Managing Director Sustainable Value Chain Solutions at Supply Chain Insights Philadelphia, United States. Dr. Sander de Leeuw (Mr.), Associate professor of Logistics (Vrije Universiteit Amsterdam, The Netherlands), Professor of Operations Management (NBS Nottingham, United Kingdom). Steve Leon (Mr.), Clinical Professor of Supply Chain and Operations Management, University of Central Florida Orlando, United States. Dr. Steven Dunn (Mr.), Professor, Director of the Center for Sustainable Enterprise, Department of Finance and Business Law, College of Business, University of Wisconsin Oshkosh. Taylor Wilkerson (Mr.), Supply Chain Risk and Sustainability Expert, LMI Research Institute Virginia, United States. Page 159 ANNEX 2: The July-November 2011 Thailand floods and disruptions in the global hard disk supply chain The July to November 2011 Thailand floods impacted the worlds production and supply of computer hard disks. With 40% of production capacity being concentrated in Thailand, one third of the industrys output was hit and it would take the IT industry almost a year to get over the effect of the floods. The main hazard was the landfall of Tropical Storm Nock-ten, increasing the normal rainfall of the monsoon season already underway for two months. The main climate risk source was the build-up of water due to this increased rainfall in combination with as discussed later the human risk source of poor water management at Thailands Nothern dams early in the year, causing them to fill to capacity more quickly than expected and the need to let the water go. The main climate risk event was flooding, resulting in the risk of inundation of factories with the risk consequences being a loss of assets, infrastructure, production capacity, company stock value and market share. The climate risk event developed at Operational Level 4 The Natural Environment, with risk sources partially coming from lower levels. Figure 51: Western Digital factory inundated by flood waters 374 374 Fuller 2011, Figure 1. Page 160 But not all companies were equally exposed; Western Digitals two hard disk production facilities were inundated, while Seagate had chosen a higher area further away from the flood plains for their two factories. This choice resulted in longer transport lines, but it also limited flood risk exposure. Western Digital also produced sliders, a crucial hard disk part, in their inundated factories and these were produced in Thailand for most of their production facilities in other countries. Western Digital also had its main vendors concentrated in flood area industrial estates, whereas Seagate had its vendors more dispersed. This concentration of production of one crucial part in a flood-prone area and of centralized / isolated vendors increased Western Digitals risk sensitivity and created a knock-on effect. Due to the low supply of hard disks worldwide prices spiked 20%, which increased Seagates profit margin from 20 to 30% for a while. Seagate had limited its exposure and vulnerability by making smart choices with respect to Level 2 Assets and infrastructure dependencies, as well as Level 3 Inter-organizational networks. Western Digital, however, showed very strong adaptive capacity, by quickly adjusting its financial estimates, informing their shareholders and being transparent about how they were tackling this particular risk event; not just waiting for the water to go down, they increased production capacity in their Malaysian plants and they moved key staff temporarily. Their quick and sensible risk management resulted in the final risk impact being kept at bay, regarding company stock value and market share. There were a number of human risk sources in this risk event, for example the poor water management at Thailands Northern dams release from the reservoirs should have started much earlier, the slow construction and poor maintenance of flood barriers, poor government-level disaster management, poor communication between provinces and government ministries, and very poor communication about the disaster and disaster management decisions towards those affected. 375 375 Fuller 2011; Kovar 2011; Ribeiro 2011; Struck 2011; Yuvejwattana 2011; Zhang 2011; Chu 2012; Maleval 2012a and 2012b. Page 161 ANNEX 3: Interviewintroduction and consent Dear interviewee, This interview is taking place as part of my MSc thesis research study. The aim of this research is to study climate risk indicators as part of the Supply Chain Risk Management Process (SCRMP), to facilitate the development of risk adaptation and mitigation plans to improve supply chain resilience towards physical climate change and environmental risk sources, including extreme weather, to be called climate proofing. I would like to start with thanking you for taking part in the researchs expert panel. The expert panel is an important tool in the refinement, validation and triangulation of data collected as part of this research study. This interview will take approximately 45 minutes to an hour of your time and will follow a semi-structured non-standardized interview protocol. This means that there will be a number of fixed open-ended and close-ended questions, but there is space to deviate from the questions and have discussions beyond these fixed questions. The aim of this interview is to inform, verify and refine the descriptive elements of the first three research objectives to inform the development of the subsequent internet-mediated questionnaire, which will be sent to a wider group of supply chain and risk management experts. Please note that the interview will be recorded. The reason for this is twofold; First to not get distracted during our conversation by the need for physical note-taking, and secondly to be able to verify answers at a later stage. A transcript of the interview will be sent to you for verification. Please note that by participating in this interview you consent to your responses being used within this research study. The interview transcript will not be shared with any third parties and separate consent would be requested if any quotes from the interview would be used in the final report. Page 162 ANNEX 4: Interview protocol Time of interview at interviewers location: Time of interview at interviewees location: Date: Place: Interviewer: Interviewee: Gender interviewee: Position of interviewee: Q.1. Do you feel supply chains have been more than marginally impacted by physical climate change and extreme weather events (to be called: climate risk events) over the past three years? Q.2. Can you give a few examples of supply chains being impacted by climate risk events? Q.3. How would you describe the extent to which supply chains have been impacted, the extent of negative consequences of climate risk events? Q.4. The risk consequence as used in a risk matrix has a scale from 'negligible' - 'minor'- 'moderate' to 'severe' and finally 'critical'. Does the use of such a scale allow for objective results and comparison between risk events? Q.5. Any thoughts on how to quantify climate risk consequences? Q.6. From a risk management perspective; should climate risks and related risk consequences on supply chains be of growing concern, or not? INFO: Risk indicators are metrics used to monitor identified risk exposures over time. 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. Climate risk indicators are Page 163 those risk indicators that link directly to physical climate change and weather-related risk exposures. Q.7. Could you come up with climate risk indicators to be used in companies Supply Chain Risk Management Processes (SCRMP)? INFO: Risk categories indicate the grouping of risks by characteristic supply chain or organizational elements, for example; demand risks, process risks, transportation risks, disruption risks, delay risks, organizational risks, etc. There are various ways of categorizing risks. Q.8. Could you come up with risk categories in which climate risk indicators are, or should be, taken into account? Or do you feel that climate risk indicators should have their own, or no specific risk category? Q.9. Would you have any comments towards the result of the literature review and how this should inform subsequent research steps, taking into account the research objectives? Page 164 ANNEX 5: Interview transcripts Interview 1: Taylor H. Wilkerson Time of interview at interviewers location: 15:38 Time of interview at interviewees location: 15:38 Date: 8 October 2013 Place: online - Skype - done from Tennessee, USA Interviewer: Dennis Bours Interviewee: Taylor H. Wilkerson Gender interviewee: Male Position of interviewee: Supply Chain Risk and Sustainability Expert, LMI Research Institute Virginia, United States. Answers [A.1-1] (6m18s) Yes [A.1-2] You can look at some examples like the Thailand floods, which has been a pretty dramatic example towards impacts on the supply chain due to climate change and climate risks. It is also interest to explore some potential benefits from climate change on supply chains. One potential benefit that has been talked about a lot is the opening up of Northern shipping routes, being able to ship more to St Petersburg given there is less ice. [A.2] (7m33s) When you are looking at events such as severe weather, it is perhaps a little tenuous to link these to climate change. But events like Hurricane Katrina, which dramatically disrupted supply chains as well by actually taking out the port of New Orleans. Hurricane Sandy did quite a bit of damage as well. Any time you have a severe storm it has the potential of impacting local supply chains, at least temporarily. [A.3-1] (9m15s) time to recover lost revenue lost profit lost revenue as percentage of total yearly revenue Page 165 [A.3-2] To some extent it depends on the risk event and the supply chain in question. I know with the Thailand floods there were some significant disruptions in the supply of electronic components such as hard drives and others, which impacted the ability of computer manufacturers to keep product on the shelve. I have not dug into the specific cost of such events. I know the metrics that some companies use, like Cisco uses, is the time to recover as a way of looking at the cost of risk events. Others use lost revenue. But I dont know for those events any specific cost associated to those. [A.4-1] (10m30s) Yes, with some constraints Within a company risk matrices allow for comparison and facilitate prioritization decisions on which risks to address first. Across differently-sized companies and supply chains or when comparing between industries you need to consider differences in definitions of what is considered as risks and risk consequences. [A.4-2] I think it does to an extent. I think within a company, within an organization, it certainly does because you can put some definition on those scale metrics. When you start looking across companies you have to consider that there is a relative scale there. So what is considered as critical or catastrophic for a company like Cisco, which is a multi-billion dollar enterprise, is different from what is considered critical to a smaller company with only 15 employees. A 10 million Dollar loss probably isnt that much to Cisco, but for a small company 10 million Dollars could possibly be the end of the company. Within a company a risk matrix allows you to compare risks and make some decisions around which risks you need to address first, because you need to prioritize. When we start looking across companies or across supply chains it gives you a way to look at the relative exposure, but you need to consider that there is a difference in definition on what would be considered negligible or catastrophic etcetera for different sized companies. I think there is also the effect on comparability for different industries. A two day delay in one industry that manufactures just-in-time might be very much impacted by a two day delay, while two days in another industry might not have an impact at all. Page 166 [A.5-1] (13m00s) In general there are pretty good estimate of the consequences. When you are looking at the probability of occurrence and the consequences there is always a danger of trying to be too precise. The metrics of time to recover, lost revenue or lost profit allow you to put the consequences in business terms. lost revenue as a percentage of total annual revenue [A.5-2] Time to recover basically says it will take us so many days or so many weeks before we can serve customers again. Lost revenue but it in the context on what we are directly going to miss when we cannot supply the product for a given time and keeps it at a high enough level you can still use reasonable estimates and you get not bogged down in trying to be too precise about it. You could use lost revenue as a percentage of total annual revenue, giving the ability to compare across companies. Time to recover might be a bit more comparable as well, but you might still have some issues towards the type of industry; two weeks to recover might be a really bad number for an electronics company, but maybe a perfectly acceptable number for a heavy equipment manufacturer for example. [A.6-1] (15m40s) Yes [A.6-2] Drought / water scarcity / customer migration / change in customer needs and preferences / increased electricity need and cost / air quality / employees health [A.6-3] When I look at where the risks are from climate change, there are some immediate ones like extreme weather and those companies are pretty well tuned in to from a sense of severe weather incidences in general and how to prepare for them. There are some others that become a little more interesting in that they have the potential to catch companies off guard. I think of drought and the availability of water and what that might do for industries that rely on water or that rely on agricultural products. Drought and water scarcity have the chance to be significant. A secondary one as the climate is changing as you are seeing different weather patterns, different drought patterns, there is the chance for Page 167 customers to migrate either physically or migrate in the sense of need and preferences. It is possible that consumer preferences continue to move towards companies who are actively mitigating climate change. Another good example of a secondary effect is increased energy needs and costs. One other is public health. When you look at climate change and public health you get to air quality due to increased ground level ozone. You get into health issues that impact your employees health. You can think about the potential of people taking more sick days from work, not being able to work at their full potential. It is possible this could create a slow- down in productivity. [A.7] (20m50s) rising sea levels increasing water scarcity occurrence, duration and intensity of extreme weather events. [A.7-2] An obvious one looking at shipping lanes would be sea levels, looking at the ability of that impacting the ports and goods to flow through different ports. You could look at water scarcity or at measuring some kind of water stress in different regions where a supply chain operates. There should be a way to define a severe weather event and somehow measure the mode of occurrence, intensity and duration of severe weather events in the different regions where your supply chain operates and track and detect whether that trend is increasing. Extreme precipitation, tracking the amount of water over a certain period of time would be a good indicator. Looking at the impact of climate change it does evolve a lot more around changing weather patterns and more extreme weather patterns and drought as an indicator for water stress in a region would be an equally good indicator. It does get into an area of not just maintaining production that requires water, but also health and ability of work forces in a region. [A.8-1] (25m15s) Specific climate risk category [A.8-2] There are probably some risk categories like severe weather or severe natural disasters where climate risk indicators would find a natural home. However, there are some others that get into the longer term impacts on climate change, such as the sea level changes, such as increased water stress or potential public health issues that would tend to Page 168 lead towards a separate category, because they are not going to be found in other traditional risk categories. The value added of having risk categories goes to the monitoring and mitigation of the risks. So being able to separate severe weather from supply or financial viability provides you to understand the different nature of those events. Severe weather you have no control over; its going to happen, probably you only have a few days warning, whereas financial viability there are ways of tracking, working with suppliers and you will probably have several months of warning and there is very different mitigation activities. With severe weather events it usually takes more of a standpoint of having a response and recovery plan in place to deal with those. Categories help in terms of how you monitor the risks and how you respond. There needs to be a blend of both contingency planning and post risk management. Companies that are really being effective in risk management are taking a proactive approach of looking at what the potential risks in their supply chain are and what they can do to address the likelihood of occurring and consequences of these risks when they do occur. And at the same time put into place good response plans that they test and communicate with their suppliers in order to be able to respond and recover quickly if things occur. [A.9] (29m55s) Good review. Good overview of the literature on the intersect of climate and risk. Look for: LMI climate change and risk book! Chapter on supply chain mitigation and adaptation towards climate change. Comment: Climate risks, with a focus on severe weather events. Other types of climate risks taken into account less. Comment: Figure 13; risk matrix, being a mix of direct and indirect risk consequences. The risk events on there are often not taking place in isolation! The risk is not the drought or flood, but the transport delays. Trigger events! Page 169 Look at: Bow tie risk assessment approach, have a look at it! Risk analysis/evaluation in the ISO approach, use the bow-tie assessment approach. Interview2: Steven Dunn Time of interview at interviewers location: 17:00 Time of interview at interviewees location: 14:00 Date: 8 October 2013 Place: online Skype - done from Tennessee, USA Interviewer: Dennis Bours Interviewee: Steven Dunn Gender interviewee: Male Position of interviewee: Professor, Director of the Center for Sustainable Enterprise, Department of Finance and Business Law, College of Business, University of Wisconsin Oshkosh. Answers [A.1-1] (11m54s) Absolutely Yes [A.1-2] Obviously the more glamorous ones, like the hurricane that hit New York, certainly the Fukushima disaster if it is within the last two years. Last night they had another typhoon hitting the Southeast coast of China and I believe the number they gave was that it was the 26th that hit them this year, which was staggering to me. It immediately comes to mind; how are you going to do business if you have 26 typhoons hitting your supply chain and/ or your suppliers. Typhoons hitting the Southeast coast of China [A.2] (12m55s) Certainly things are changing, there isnt any question. You can look at droughts. I worked in the food industry for many years and droughts are something that can absolutely stagger you in the food industry. You dont expect it, you dont anticipate it and it happens after youve perhaps already negotiated for your supply at a certain place and time. Australia is a perfect example with 8 years under drought conditions being absolutely hammered. [Australian droughts impacting the agri chain] The central valley of California is the bread basket of the United States, but Page 170 the river system in the valley has been under stress and duress for the past years. [Water stress in the Californian central valley, the US bread basket] Its dryer, more people, deeper drilling, lower water tables, also resulting in seawater moving into the delta. Hurricanes are perhaps less of a big deal, because you can plan for them. You know when they are coming typically and Wallmart is an example of a company that does a great job in taking weather events into account in their supply chain. Hurricanes are predictable, tornados to a lesser extent. The climate change has made storms unquestionably more violent. And look at a country like Bangladesh, the forever weather whipping boy. Seriously, that poor country is not going to exist in the long term. The big challenge is feeding your population and how are you going to provide crops in an area that is constantly under water? [Flooding in Bangladesh] The change in the Arctic is a positive ones with all the supply chain guys singing haleluja now that we suddenly found a mysterious Northwest passage and we can suddenly get ships through in now time from Russia. How to develop mining supply chains in Siberia once the permafrost would start melting? There would be no way to get through the mud. [A.3-1] (18m40s) Short term on financial impact. Long term on social impact, though challenging to measure. Long term climate change attrition cost, e.g. work force and customer base migration. [A.3-2] It can be a couple of things. When looking at single events, its immediate, its short term and they get around it, cost get up for a while and then it settles back to normal. The main focus there is on financial impact. Long term: In the United States you are starting to hear the words onshoring and nearshoring again, basically bringing things back closer. Supply chains have been hyper-extended chasing cost reductions, resources and cheap labour and it has been enabled by containerization and the advantages and low cost of modern-day shipping. Page 171 Supply chain climate disasters might make us think about sourcing so far away, but also about social impact through work force and customer base migration. Climate change has a long term attrition cost through work force and customer base migration. [A.4-1] (28m20s) Easy to use, Comparability is questionable [A.4-2] It is a good question and Id be interested to find out how many companies are actually using such a scale?! I like that kind of scale and its an easy way to assess things, but can you compare things with that?! I think you will run into the issue that there is a lack of understanding in a firm on what this actually is. Where are the people who actually understand risk assessment?! Especially in the C-suite people have not been educated in long term risk management and there is also the corporate culture of thinking that things happen to others and not your company. The companies who develop a culture of long term thinking are the ones that are going to be there in the end. Climate change and its impact is like the launch of the Challenger space shuttle, the one that blew up on launch; you have all those really smart people somehow coming to a collusive agreement to launch and they get predictable consequences. You can say the same thing about climate change and its impact. You got the collective stupidity going on refusing all the science and if these were your financial figures instead of climate change figures youd be panicking. [A.5] (33m10s) Figure of financial loss. The challenge is the interconnectedness of it all, which makes it really hard in a business context because we like to peel away elements like an onion till we got something we can measure. You can assume away stuff till you get a model, but you will assume away stuff that is interconnected. [A.6-1] <Already implicitly answered and the question was as such not repeated> Yes Page 172 [A.6-2] The challenge is that we require people we traditionally dont have in the pantheon of corporate decision-making, leaders who can grasp the interconnectedness and bring that long-term, cross-sectional, cross- functional thinking in organizational decision-making and who inspire and leverage it to get people behind them. Maybe a companys ERP system can be the climate change risk management vehicle, given it has that interconnectedness, we invested heavily in it already, it would legitimize climate risk management decision- making and perhaps we should model climate change into a companys ERP system. We leaned everything to the extent that we can wonder who will be there to take it on. In between question (39m00s) on cross-boundary/sectional/functional thinking. < Most of the rest of the discussion was towards leadership and has been added to the above answer > [A.7] (43m45s) Long-term: What about the price of oil? Oil fluctuates very much on perception of risk. Temperature change. Food price index. Change in water and drought conditions. Some other wild ones: - Education per capita as indicator of climate risks (Note from interviewer: will more be an indicator for vulnerability and exposure, not risk predictability of events and/or to a lesser extent risk consequences to be expected) - Insurance cost as indicator, insurance cost on capital assets. The challenge is to walk away from the standard business performance indicators. [A.8] (52m10s) Specific climate risk category, in the beginning I think it is a two-sided question. Is it better if you give it a title and you give it visibility as a category in its own right? This can go two ways: They make it a title, they add a Chief Climate Change Officer. That must be important, or it goes like: Well, someone is covering it, so I dont need to Page 173 look at it or think about it. The Chief Regulations became Chief Sustainability and would then become Chief Climate Change. In the future climate change, environment and related social links will become part of a general discussion in supply chains on a daily basis, in all the elements of the business; operational, financial, processes. But it is basic change management. You need to create urgency, you need to make it visible, you give it a title, you get the right people on the bus before it becomes part of mainstream decision-making. It does take recognition at the top and that is where it becomes a challenge. In the end you will need climate change indicators in a lot of categories, but you need to start someone and someone needs to manage the store. Examples: SC Johnson / Wallmart. [A.9] (62m20s) Laid out well. Note: Tip; find examples of firms who are leading. (Ask Nancy Gillis and Ira Feldman). SC Johnson (?) 3PL and their impact on decision making in companies is huge, because the use of 3PLs is the abdication of your own management responsibilities by outsourcing in the name of efficiency of course. I think the firms that have a lot of 3PL activity might have abdicated the supply chain risks by distancing, outsourcing to 3PLs and they dont understand the reach anymore this has on supply chain and sourcing risks. Firms are looking at their finances, the quality and speed, and they look at it from a legal perspective to see where they can hold someone else responsible when it goes wrong. - Incident-driven response to risk management?! Role of social media? (BP) - How does it inform decision making?! Change management - The impact of regulations on their behavior?! - Driven by energy efficiency / lowering the carbon footprint?! Page 174 Interview 3: Kevin Watson Time of interview at interviewers location: 18:05 Time of interview at interviewees location: 18:05 Date: 23 October 2013 Place: Washington DC, in person Interviewer: Dennis Bours Interviewee: Kevin Watson Gender interviewee: Male Position of interviewee: takes part as independent subject matter expert on the topics of Life Cycle Logistics and Supply Chain Management. He works at NASAs Logistics Division, NASA Headquarters Washginton DC, United States. Answers [A.1-1] (0m20s) Yes, extreme weather events. [A.1-2] Certainly extreme weather events. The degree to which those are driven by climate change is uncertain. [A.2-1] (0m45s) I think of the Thailand floods, though Im not sure it is within the two year timeframe. Drought impacting barge transport on the Mississippi river. [A.2-2] Hurricanes, severe storms certainly could influence shipping and air transportation. It would not necessarily preclude transport, but there might be diversions with scheduling impacts and perhaps some cost impacts. Extreme heat can cause buckling of railway tracks, which then could cause significant diversion or the need for a selection of alternate transportation modes, which could affect cost and schedule. Extreme drought can have an impact if you are dependent on barge transportation, on rivers. And that has actually happened in the United States in recent years in the case of the Mississippi river impacting barge transportation. [A.3-1] (3m00s) cost consequences schedule consequences. [A.3-2] I dont have specific metrics in mind for particular incidents. But in general the type of effects that would be measurable be potential schedule Page 175 impacts either because of the simple inability to transport because of the risk event, or diversion as a result, or in some cases schedule impacts due to deterioration of the infrastructure. Pretty much for all of those there could be a cost impact as well. [A.4-1] (4m40s) Yes [A.4-2] Trying to overly quantify a risk, making it too precise, almost would make it become meaningless. In most cases there be enough unknowns that you would not have a very high confidence in a very precise level of measurement. So you can have a very precise number, but your plus and minus range would have to be fairly significant to encompass the possible actual value, given the level of assumptions needed to come to such precise number. For example: If you would be having a hurricane on a coastline and you have a very precise number for the possible financial risk consequence, then the actual value in practice will for example depend on what side of the eye of the hurricane you are on, i.e. one side might have tidal surges and heavy rains, while the other side has an offshore wind. Your contingency planning should cover the range, but in terms of trying to pin down the risk consequence you will be within a range and a very precise value would not be so useful. Using a risk matrix for comparison you would probably learn more comparing different types of events. If you would try to compare the consequences of a category 1 hurricane and a category 4 hurricane there would be some difference potentially, but well. As a second answer, any individual entity should probably look at what are the most likely risk events to affect them given their operational and geographical context. Your probably would need to look at the likelihood of the various types of risk events. If you would be doing a broader general approach like for your study for supply chains in general, then maybe you would want to assess and compare the different types of risk events as opposed to the severity of individual types of risks. [A.5-1] (11m20s) Yes, not too precise. See A.4-2. [A.5-2] The quantification of climate risk consequences could be both Page 176 time based and money based. It also depends on the type of risk event and perspective. Some risk events will have mainly a short term financial impact, whereas other risk events have both a financial as well as a serious downtime consequence translating into a ripple effect. From your customers perspective there is a schedule effect and from your perspective there is the cost of making up for down time, cost of making up for lost production. The other thing is what is the impact of a climate risk event on your employees? Your facility might have suffered limited impact, but your employees may be more subject to the effects of the risk event. Now they are going to be preoccupied with their personal situation. The other thing is that you need to think of the company not just as this monolithic entity, but its got people working for them that might be impacted. Employees loss, how to quantify that? [A.6-1] (13m52s) Yes. [A.6-2] In my opinion climate change is a real issue. I think its a serious issue that is going to result in increasing negative consequences, both in a very broad sense but also in terms of acute weather-related events that will be exacerbated by climate change. [A.7-1] (15m20s) Temperature changes Changes in river water levels Change in precipitation levels and intensity [A.7-2] I think it is a challenge. You have climate change so you can have indicators, some metrics, that help you track the magnitude of climate change over time. That could be temperature, delta temperature against a historical mean, precipitation. So you can have climate change indicators. The key the is whether these directly relate to potential risk events? I think the issue is that the key risks to industries are probably more weather related risks, with exceptions. So somehow you have to translate from the climate related risk metrics to weather related risk metrics. The probability of extreme weather events Page 177 changes as the climate changes, so there is some transformation function that has to exist between the two. An increase in precipitation over time in itself would be difficult to view as a particular risk towards supply chains. Somehow you have to translate that into acute effects that impact supply chains. One climate related metric that could be related to supply chains might have something to do with mean annual rainfall, but the actual supply chain risk has to do with river flow, aquifer level, etc. translating into river water levels or aquifer levels as the main climate risk indicator. There is no need to waste time and effort to monitoring a basket full of metrics if a lot of them dont really measure any impacts in the context of a specific supply chain. You want the ones that are relevant to you, you certainly want to monitor those risk events that have the most severe impact on you, but it also only makes sense to monitor those that relate to climate risk events that you can do something about. That either you can prepare for, or you can have backup plans for, or you can respond to in some way. If its something you cant do anything about, then theres no point in monitoring it. [A.8-1] (22m18s) Depends on what the company sees as critical [A.8-2] A choice for certain risk categories should be informed by and concerned with whatever impacts the company. If what they are most concerned about is schedule, then your climate risks should end up in a category that is schedule related. If its weather impacting cost of materials, then use your climate risk indicators in a related category. Whatever you feel is the most critical, the category impacting the most and then focus on risk events that are most difficult to adjust to. [A.9] (24m40s) I enjoyed reading it and thought it was really interesting. Discussion of financial impacts (Swiss Re data) -> The cost of natural disasters to economy is growing, but is it because of the increase in incidents and magnitudes of those disasters? Or is over time the size of population / industry growing, i.e. has the location changed, resulting in more of a cost impact when it is being hit. Add a caveat on what is real cause and effect here! More losses does not mean that is due to more climate change impact. Page 178 Interview 4: Nancy Gillis Time of interview at interviewers location: 17:05 Time of interview at interviewees location: 17:05 Date: 24 October 2013 Place: Washington DC, in person Interviewer: Dennis Bours Interviewee: Nancy Gillis Gender interviewee: Female Position of interviewee: Senior Manager Sustainable Procurement, Supply Chains and System Dynamics, Ernst and Young Washington DC, United States. Answers Addendum to the statement of use of the interview: In answering the questions Mrs. Nancy Gillis will drop on some of the activities she did when she was a United States federal government representative and any answers given and comments made are of Mrs. Gilles her own opinion and interpretation, and she does not speak in any form or fashion on behalf of the United States federal government. [A.1-1] (1m32s) Yes. [A.1-2] I believe the most often cites example are the Thailand floods that are well know to have impacted several sectors as far as their ability to deal with the resulting supply chain disruptions given they missed certain components they needed for the products they supply. [A.2] (2m08s) One that people actually dont think about in the supply chain mandate is the impact of super-storm Sandy on New York city and in particular the area we [Red.: EY] look at, which is the supply chain within the city of the pharmaceutical suppliers and/or the resellers of pharmaceuticals or drugs, and the impact on the population. There is the impact of extreme weather events on a customer base when the event happens. In Ernst & Young we talk to our clients about supply chain resiliency and their ability to plan for climate change events, which we understand Page 179 exacerbates natural resource shortages. Most organizations do look at it from the supply side, so having the ability to gain access to agricultural sources and so forth, and they look at it from the infrastructure, the connective tissue, so the supply routes as well as the ports, airports and other ways via which transportation actually happens. Very few of the actually look at it from the demand side and a lot of growth for American companies is in emerging markets, which are the least equipped to deal with climate change. How their products are currently produced, delivered, what they are comprised of and how they are used may actually change in those markets as climate change takes hold. It is very challenging to change a products composition to contain the brand promise. An example would be Tide as a washing detergent and how does a brand that has a promise that is dependent on water and electricity change in a market in which you cannot count on either of the two being available. [A.3] (2m44s) impact on customer-base during weather events. climate change events exacerbating natural resource shortages. demand side impact, especially in emerging markets. [A.4-1] (5m45s) Yes, with some constraints If one could have confidence in the predictiveness of the volatility of the weather events. I think the comparability between events is lost. [A.4-2] To me, that is exactly the challenge of climate change. You dont have linear predicatability any longer and the volatility as well as the actual breadth and depth of impact is an unknown. Though I would not know how you would use such a matrix, except after the fact. Which means that it is not a good risk indicator. All the things that you would normally use for a risk indicator would not work. You can only come to an agreement that the risk event that already took place was of equal parity, bad or not. There would be little value in after the fact comparison, because it is questionable how predictive you can be on climate change with a risk matrix. So apart from everyone agreeing that it was bad, trying to take that data and feeding it into a predictive model would be very helpful. Page 180 I think the comparability between events is lost. People talk about rising water, but the actual challenge is not the ocean rising in essence, it is storm surges after events. You can do some comparison predictively to understand what to expect from a storm surge and what the risk is, if that a storm event of similar magnitude would then hit again you would have a baseline for preparedness. The challenge is though that there is a cost to that level of preparedness. Without linear predictability on how often that storm may occur it is challenging to have a discussion about preparedness and use that risk information, because you can only say with limited certainty that the cost of preparedness is worthwhile. The crux of the problem of risk analysis of climate change is the non- linearity of what climate change means. Risk analysis in the supply chain on climate change should identify where the company should not go first and foremost, as well as what they may be able to ask of their suppliers as minimal safeguards. But then I really see an opportunity (and a risk) for the insurance sector, because of their ability to insure against what may be less probable, but still potential, to where corporations would be protected. As such there is a growth in changes to assets that is in that space, but also an increase in financial responses insurance to climate change risks in the supply chain. You have the tangible response; you do some physical change to the asset thats there. Then there is the information piece and I think thats an interesting one. You now see that information is putting risk back into the supply chain, for example co-location for sustainability where warehousing and distribution come together, like it also increased risk in Thailand. And the last piece being the financial. (10m20s)< Discussion first started on insuring, which is added to the previous answer > [A.5] (15m35) Money. financial loss of market share loss of life loss of customer-base. Page 181 In the end you can take anything and quantify it to a unit youd wish. There is the business as the organization and their unit of measurement is dollar (money), or market-share and costs into dollar. You have non-profit or research organizations, which are interested in the data on the possible consequences. Their unit is data. And then there is government, which tends to quantify in dollar and loss of life, i.e. threat to their populus. If you talk about environmental sustainability you talk about resource availability and there time is more predictive. A water resource for example does not disappear in its entirety over night. The whole point about climate is that time is no longer a predictive component. You dont know when and for how long those weather events will occur. Time continuum in weather events is lost, which makes the cost component so challenging. [A.6-1] (18m40s) Yes, they should be. [A.7-1] (19m27s) increased volatility of weather events Long term temperature differential [A.7-2] The number one climate risk indicator is place. Climate change and environmental sustainability pose place-based risks, i.e. exact geographic locale is of importance. In EY we define climate related risks predominantly towards the unpredictable nature of weather events, which we coin into the term increased volatility of weather events as measure. Drought, water availability, long term temperature change, other resource availability, those we term under sustainability risks. And those may be exacerbated by climate change, but some of those are predicated upon human use of those resources and therefore arent initially really linked to climate change. You actually first need to track what are some of the sustainability constraints, those being resource availability constraints. And the understand how climate change play a role either through adding an additional risk factor through extreme weather events or climate change will only exacerbate those sustainability risks. Page 182 Long term temperature differential is a big one. And that is one that companies should look more at, because that generates an understanding of where your sourcing will come from in the next 10-20 years, as well as understanding that the change in the seasons is giving rise to different types of biological risks, such as pests. Case in point; Greening disease in Florida wiping out the entire orange growth. Im not saying thats climate change related as far as causality, but Im not aware of a study that has disproved any correlation between the change in weather patterns, lack of strong winters and the bacteria that has caused that. [A.8-1] (26m20s) Take into account in existing categories [A.8-2] I think climate risk indicators on climate change, extreme weather events and sustainability should be included in existing risk categories, demand being a primary, transportation, organizational. The way we break it down simplistically is that we break it down not only as supply chain but as value chain, that is inclusive of customers on the demand side. And we take an asset perspective that is organizational, meaning that in the C-suite we talk about risk appetite and not in supply chain terms. < Left value chain/rare earth discussion out of it for the data analysis part, though it was a very interesting discussion > Under sustainability risks there is not only environmental and social towards natural resources, but also geopolitical risks. It just so happens that certain scarce resources are situated in certain parts of the world, the Congo being a good example, where climate risks may exacerbate the already existing environmental, social and geopolitical risks of resource scarcity and access. When you talk about climate you will have to expand the view of the supply chain to the entire value chain, because climate will have significant impact on the ecosystem the customer finds himself in. That will bring with it its own constraints, towards the usability of the product, the ability to deal with refuse, the shortening of companies supplies chains and what the social effects will be to move towards near-sourcing. Page 183 [A.9] (35m30s) Climate Sustianability: It would be good to separate climate risks from sustainability risks to see where the two overlap. The assumption I base my work on is that climate change will only exacerbate the sustainability risks, inclusive of environmental, social and geopolitical risks. What are those? What are some of the metrics? How can one minimize those as longer term risks, because I think time will only mean worse impact? Design / value-chain: I think it is short-sighted to only think about supply chains, because if you dont expand to the value chain you miss the customer use that drives the supply chain. The assumption from environmental and sustainability concerns is that one needs to design the products differently with significant positive ramifications for the supply chain itself. Future-proofing: We are often talking about future-proofing of supply chains. We first do an analysis of what are the current components of the supply chain and obviously your suppliers. Any sole supplier is critical and need to be looked at. One way would be to put clauses in your procurement contract with them, for example that sole suppliers themselves build redundancy outside their geographic locale as a prerequisite to do business with them. Questionnaire respondents: Sourcing/procurement professionals, next to the risk managers and supply chain managers. Other comments: Seniority think / Gender differences / Geographic location Organizational culture: Siloed vs. inter-functional / Flat vs. hierarchy / Geographical culture -> where you are from vs. where your organization is from. Note of interviewer: Would not mind to hear more on how EY makes the link between climate change, sustainability and pharmaceutical supply chains as was discussed, given my focus on these quality standards, quality control and cold chains in post-emergency transitional or developmental settings. Page 184 Interview 5: Peter Murray Time of interview at interviewers location: 8:00 Time of interview at interviewees location: 20:00 Date: 28 October 2013 Place: online Skype - done from Phnom Penh, Cambodia Interviewer: Dennis Bours Interviewee: Peter Murray Gender interviewee: Male Position of interviewee: Managing Director Sustainable Value Chain Solutions at Supply Chain Insights Philadelphia, United States. Answers [A.1-1] (7m06s) Yes. [A.1-2] For example the Icelandic volcano eruption, though that was not a climate change or extreme weather event. It was a natural occurrence event and a very good illustration on what an extreme natural event can mean when it comes to the disruption of global supply chains to natural events. The Icelandic volcano is a good example of the vulnerability of global supply chains, as are the Thailand floods and the Japanese tsunami and resulting nuclear events. [A.2] (8m39s) One direct example of the impact of extreme weather events on production and distribution facilities in low lying areas is of Dupont when hurricane Katrina wiped out one of Duponts facilities for the production of titanium dioxide in the gulf. Not only was Dupont affected, but many, many companies and the built infrastructure in that low lying coastal area. [A.3-1] (9m49s) cargo loss [A.3-2] Id say that in the total amount of trade that is moving around the world it is relatively small, but significant. Every cargo vessel that has crossed the Pacific or the Atlantic has incidents of loosing containers due to storms. They either get blown off by the storms or cut by crews to maintain the stability of the ship, but that is a pretty regular occurrence and as the weather seems to get rougher it certainly adds to that. Ocean-going Page 185 container ships are essentially not weather-proof and extreme weather events are going to increase the losses in the shipment of containers. The use of super-max ships, being bigger and bigger container ships, lowers the cost of transport, but also increases the risk when they end up in extreme weather. Weather events are either typically going to impact either coastal areas or have an impact on the water. If you look at the amount of global trade over the world and the impact of extreme weather events, it can probably be concluded that youre seeing an increase of trade being affected. [A.4-1] (12m53s) No, more subjective. [A.4-2] I think its more of a subjective matter than objective on a scale like that. You really need to be able to look at the possible value of risk events to be objective about it Only hindsight is going to give you a correct value. There is some good work coming out of MIT [Massachusetts Institute of Technology] by supply chain professor Mr. David Simchi-Levi - He is one of the top supply chain and network logistics professors in the world has been doing more on risk in the last couple of years [Note of Interviewer: Main focus on modeling with a link to sourcing, though the main author of his risk-related articles is often Xin Chen, Department of Industrial and Enterprise Systems Engineering - University of Illinois, who I already identified as risk thinker]. Josey Sheffey is a colleague of David Simchi-Levi, who did quite a bit on resilience in recent years. Note of interviewer: could not find any information on him. Ask Peter! The way David approaches it is by looking at the supply chain network, including the supplier-base. They do a series of analyses that look at whether suppliers and/or facilities are in risk-prone areas. When looking at US agricultural regions where they had 50-year floods reoccurring in a span or 10 or 15 years, you got measurable events and David created an index based on risks that you can use to geographically measure the risk potential of your supplier-base. Then you can do more specific analysis from there. Page 186 [A.5-1] (16m48s) Value of goods lost Value of damage to facilities exposed Redundancy cost Financial loss of productive assets Flexibility cost You can quantify it by looking at weather patterns historically Ill give you an example: Were working on a biofuel supply chain here in the US Midwest, using non-food biomass. One of the things we had to do to estimate the inventory was to actually do a study of the weather going back 50 years to try to establish patterns for how often you would have anomalies that could either create extreme drought or extremely wet conditions. Both of which would impact the amount of biomass you would have available and thus influence the amount of inventory you would need and we were able to quantify what that might look like. [Note of interviewer: Peter is talking about quantifying the probability of risk events occurring here, not the quantification of consequences directly. Though it is interesting to see that occurrence data does also influence consequences] [A.5-2] You might be able to estimate the loss you might experience in case of extreme weather events occurring. The focus is on the usable amount of goods left and you can certainly turn that into a monetary value. You could come up with a value of the loss and also the additional redundancy cost. In my experience the way you look at resilience and risk, there are three things you can do about risk. You can obviously try to insure against it, which has a monetary cost. You can create redundancy and that is either more inventory, additional facilities or some way to compensate for loss in productive assets, which has a cost element. The third way is to increase the flexibility you have in your supply chain, which means you have something as simple as alternative suppliers or perhaps production capacity shifted from one facility to another; not to duplicate facilities, but to have the possibility to move production to other places. Flexibility cost. Risk management cost: insurance cost / redundancy cost / flexibility cost. Page 187 You always need to monetize the risk management cost and risk consequences for a business to make decisions about it. [A.6-1] (21m12s) Yes, it should be. [A.6-2] It should be part of the risk analysis of any supply chain. Supply chain risk management is becoming a more significant activity. In the past that included things like potential price changes, potential for loosing facilities or suppliers, etc. It makes sense to add climate-based and for example extreme weather risks to those same type of calculations. Though it might be smaller and you might look at it in a different way, there is already an existing and developing framework on supply chain risks. [A.7-1] (23m21s) Precipitation forecasts could be a risk indicator. Temperature forecasts could be another one. Weather index [A.7-2] Forecasts or projections of temperature. Both precipitation and temperature have short term as well as long term elements. On top of that you have seasonal elements that might become more pronounced. I was working in Saudi Arabia last year on pharmaceutical supply chains and most medication needs to be kept at an ambient temperature or colder, and Saudi Arabia is definitely not that. One of the challenges for them is to have a seasonal forecast to know the extent to which they need to control temperature within their pharmaceutical supply chains. Having a weather index can help you plan for that. Im picking the example of Saudi Arabia because it has extreme heat, but you can apply that need for reliable weather forecasting to almost anywhere regarding heating and/or cooling cost which are big components of many supply chains. [A.8-1] (27m15s) Take into account in existing categories [A.8-2] I think personally that climate risk indicators should be associated with particular parts of the supply chain, break it down to processes at different levels. And you can disaggregate and reaggregate information up and down the chain and levels you can do that as such horizontally as well as vertically. If you associate risks with those particular elements its easier to be specific about where you need to address the risk through either insurance, Page 188 redundancy or flexibility. It allows you to reaggregate to get a whole systems view and if youre not able to do the exercise on activity level you can look at a broader level and disaggregate into supply chain processes and activities. You need to look at it by supply chain processes and nodes. I think having separate climate change risk indicators in one category that is kind of to the side, makes it less impactful. Ill give you an example; If you look at the energy intensity, carbon intensity or water intensity of a supply chain including your suppliers you can aggregate that down to a unit of output, and that is becoming a pretty effective measure tool. If you would separate that measure out as a stand-alone then it would become less effective in doing something about it and it would be less effective in monitoring changes in processes and nodes over time. [A.9] (33m00s) I would look towards ocean transport insurers, like Lloyds and SwissRE, and see how they measure risk. Their job is to measure risks, because they are essentially being paid to cover that risk and thats something I have not yet seen in research. [Note of interviewer: The fact that it has not been part of research also comes down to the risk measurement being an insurers secret recipe. But it should certainly be mentioned! Is there historical information on risk insurance? That might be interesting] Certain well-defined government-sponsored agricultural insurance programmes are public information and there may be a way to access that. Online questionnaire: Target group: professionals: supply chain / risk management / sustainability officers as separate position / financial management financial decision-makers. Seniority would be important. But also decision-making capacity. How to measure the latter?! The main audience is broadly the investment community around the world, encouraging companies to measure the carbon in their supply chain / supply-base. Have a look at the APICS annual sustainability survey. Page 189 Interview 6: Ira Feldman Time of interview at interviewers location: 20:23 Time of interview at interviewees location: 8:23 Date: 5 November 2013 Place: online - Skype - done from Bangkok, Thailand Interviewer: Dennis Bours Interviewee: Ira Feldman Gender interviewee: Male Position of interviewee: President & Senior Counsel with Greentrack Strategies United States. Answers [Introduction Two schools of thought on sustainability] (File 1, 3m35s) I dont see myself as a supply chain expert per-s but what I can provide is a perspective on the varying ways that professionals and practitioners frame climate change and risk management issues, and link them to two schools of thought on sustainability in the business world. It is difficult to rely upon the result of surveys among business leaders regarding sustainability issues because there are two different schools of thought as of what sustainability means in the business context and they are not mutually exclusive. When Im talking about these things I always draw a distinction between the two schools of thought; the first one being sustainability as in 3BL, as in balancing or integration of environmental protection, economic development and social justice, versus the second one being the dictionary definition of sustainability as long lasting or enduring, thus focusing on business continuity planning and future proofing organizations - Which is the school of thought taken by most people in the business world in the United States. The latter has nothing to do with 3BL sustainability considerations. (File 3, 6m24s) There are very few people who realize the difference in connotation between two very similar sounding phrases namely sustainable business practices and the 3BL perspective versus business sustainability, which has more to do with ensuring the ongoing existence of the organization without reference to the 3BL approach. Any formulation to Page 190 combine the two has failed, given these lines of thinking come from two different sources. There are people who care about supply chain issues for only the 3BL issues. They are in the minority, but come at it from a CSR perspective as in ISO 26000. [Introduction Adaption roles] (File 3, 7m45) Changes in climate affect the health and well-being of local populations and those are the components of any multinationals supply chain. In that sense, the sphere of influence concept becomes very important in future proofing of supply chains. (File 3, 11m20) There is also the distinction between climate change adaptation as risk management versus climate change adaptation as change management. The change management element has great relevance in where the climate change adaptation issue links up with the CSR agenda and C-suite decision-making. [A.1-1] (File 3, 16m43s) Yes, absolutely [A.1-2] I dont want to be lured into the trap of mistaking a weather event for a climate change event, but I would say that over an extended period of time climate change has absolutely impact a range of supply chain issues. Was any given hurricane or other weather event caused or exacerbated by climate change? It is perhaps too early to tell, but my own personal opinion is probably yes. When you are talking about individual events you are talking about extreme weather. When you are talking about longer term trends you are talking about climate change. [A.2] (File 3, 18m50s) I certainly think that individual extreme weather events have served as a wake up call to organizations in certain sectors to begin to pay more attention to the longer term trends. Most notably is the gradual movement of agricultural belts or zones. In the popular press the example given are the rumours that grape growers are buying up land in Northern England and Scandinavia in anticipation of a changing climate. (File 3, 20m10s) The only other example Im aware of are storm surges, like weve seen with super-storm Sandy, most notably impacting the utilities Page 191 and transport sectors. Thats one example causing both individuals and companies to pay closer attention [A.3] (File 3, 22m38s) (Note from interviewer: mainly focusing on risks, not on risk consequences, which is touched upon indirectly) A lot of companies have realized that it is riskier to be sole-sourcing a particular component, given how much more vulnerable different regions appear to be. And there is a recognition that there is no way to climate proof any one place with certainty, so the trend towards sole-sourcing and just-in-time delivery of components has made organizations begin to rethink how vulnerable they are. [A.4] (File 3, 25m20s) Yes, but only to compare specific risk consequences I think one needs to be careful to compare apples, oranges and bananas. That kind of scale would be useful when looking at a particular risk consequence. From my experience in environmental management systems there is no problem using priotization or ranking systems, but you need to be careful to for example compare the risk consequence of a physical asset to a risk consequence to employee safety. They are both important but not directly comparable. [A.5] (File 3, 28m43s) Financial quantification metrics on response effectiveness metrics on responsiveness of event governance systems On the top of my head I dont have an immediate reaction to that Dennis. There will be those who do it not just in a dollars and cents approach i.e. financial quantification but also in a short-term mindset. The opportunity presented here by this challenge is to install a sustainability or a 3BL lens into the organizations decision-making process. What might initially be viewed as not viable on dollars and cents, if its looked at in a 3BL and longer-term perspective the investment might no longer look so unreasonable. My suggestion is to use the opportunity to decide to integrate non-financial metrics like metrics on response effectiveness or responsiveness of Page 192 governance systems in place - into decision making along with financial metrics. This brings the corporate sector in line with what the financial sector is already doing, being the mainstreaming of environmental, social and governance issues. [A.6-1] (File 3, 33m50s) Yes, absolutely [A.6-2] I think that the concern is heightened by recent extreme and more numerous weather events. That in itself is an indicator towards a longer- term trend of a changing climate and therefore the corporate entity not only needs to take it into account in traditional risk management issues, but also in the corporate culture towards a need for a culture and individual behaviour change that might be needed as these trends continue. [A.7] (File 3, 35m30s) I have been greatly influenced by the writings of Bob Pojasek. Bob Pojasek, teaches at Harvard and is a senior scientist for consulting firm Exponent Now. http://www.linkedin.com/in/pojasek He has always been an aficionado of metrics and indicators. He can talk for hours on the distinction between leading and lagging indicators. The real challenge will be to come up with leading indicators that can be used by corporate entities Also look at ecosystem services and the progress made by corporations in the ecosystem services construct. WRI Corporate ecosystem services review tool: http://www.wri.org/publication/corporate-ecosystem-services-reviewdsgdsg For supply chain purposes particularly the possibility of constructing leading indicators based on the proper functioning of relevant ecosystems is where a lot of action is going to be. Look at Kunreuther and Paul Kleindorfer on insurances. [A.8-1] (File 3, 46m17s) Take into account in existing categories [A.8-2] Ill use the analogy of a menu in a Chinese restaurant; as you look up and down the menu, in the margins next to 15 to 20 % of the available menu options you will see a marking like a little red hot chili pepper those are the very spicy dishes, beware! Page 193 I think it would not be useful to have a separate climate category, but it would be useful to indicate which metrics or indicators are climate change sensitive. This would then imply: Be careful in using these metrics, because you may no longer be able to rely on historical data!. That in itself becomes a categorization of metrics and indicators where it is not safe to rely on historical data because of climate change issues or different measuring systems due to technological advances. The reason that all ecologists know that they cant rely on historical data anymore because of the effect of climate change boils down the notion that stationarity is dead. [A.9] (File 3, 49m44s) (Note of interviewer: Discussed during introduction) Interview 7: Peter Jones Time of interview at interviewers location: 16:42 Time of interview at interviewees location: 10:42 Date: 6 November 2013 Place: online - Skype - done from Bangkok, Thailand Interviewer: Dennis Bours Interviewee: Peter Jones Gender interviewee: Male Position of interviewee: Managing Director, Logistics Learning Alliance Ltd Leicester, United Kingdom Answers [A.1-1] (9m55s) Yes, extreme weather events. [A.1-2] But it is hard to say whether there has been a change in the risk in the last two to three years. If your basic assumption is that there has been an increase in the number of climatic events then Im not so sure on the science. But yes, any climatic event will have an impact on supply chains, particularly in an era in which we are moving towards leaner supply chains with less inventory held in different points within the supply chain. This does increase the risk. Page 194 The scientific panels are keen on the idea that the climate will change over time and that climate risk events will occur more frequently, but were not entirely clear yet in what way it will change. We will need to take this into account when planning for the long term, but a lot of supply chains are not planned for the long term and the focus in these will mainly be on short term extreme weather events. [A.2-1] (13m20s) Flooding in Bangladesh. Pakistan earthquakes [A.2-2] An example in the long term would be a country like Bangladesh, which is very heavily involved in the production of clothing and garments for western markets and the long term threats to that supply chain are quite evident with rising sea levels posing a tremendous risks in regards to the level of flooding within that country. In terms of the long term there are real risks for many producers in that. In the same market this also applies to Pakistan as a huge producer of clothing and textiles, though with a different risk; being prone to earthquakes severe risk consequences. [A.3-1] (15m20s) time lost money lost cost increase trust breakdown [A.3-2] The short term effect of an extreme weather event is the supply chain being disrupted to the extent that deliveries are not made on time or may not be delivered at all. That creates a breakdown in trust between the supplier and his customer. And one of the key factors in building any supply chain is building trust between the organizations involved. Increase in cost is another negative consequence, because you have to go to an alternative source of supply or increased cost due to time delays. If you take the three basic supply chain criteria, being cost, quality and time, you see that climate risk events immediately can affect two of those factors. [A.4-1] (17m43s) Yes Is it sufficient to have a 5-point scale? The answer is probably yes. Page 195 [A.4-2] I dont think you want to make it overly complex. In a more mature, established supply chain you would want to focus on the existing locations and then compare the various risk events, environmental risk factors for each location in that chain. If you would be developing a new supply chain with various options in terms of where you go for your sources of supply then you would want to look at the risk events and compare between possible locations. You would not only compare the physical attributes of the supply chain, which is what the SCOR model would give you, but what the SCOR model probably doesnt give you is the risk factors involved. [A.5] (21m45s) Cost The only way would be a comparative analysis of the expected impact. Im not aware of any models that actually do that sort of comparison. I dont know if youll every get to a very precise figure, given its only based on a projection. Its a probability model whatever way you do it and therefore you will only get an indication at best. Refining it for specific geographic areas and specific sources of supply might be difficult and it also depends on the credibility of the assumptions made when refining the quantification of risk consequences. The credibility of assumptions made can only be validated over time. So in the short term you will work with more general figures and perhaps less assumptions, a bit more vagueness about the indicator model. In the longer term when you are building in assumptions to get to more precise metrics then these assumptions will have to be tested over time. The more evidence you get over time will validate or disprove assumptions and you will be able to refine your model and get to more precise indicators and measurement of your climate risk consequences, i.e. a closer estimate of what is expected to be the real cost consequence of a climate risk event happening. [A.6-1] (27m25s) Yes [A.6-2] I dont know whether it is a growing concern, it should certainly be a concern. As far as growing in the fact that people are perhaps becoming more aware of the need to plan for them than has been the case in the past. Page 196 I think people have worked on the assumption before that the supply chain they set up was relatively robust and they havent taken into account the climate risk factors. I think there is perhaps growing awareness that risk management in terms of the supply chain needs to be taken into account, especially with lean and just-in-time supply chains not having large stock of inventories that would perhaps enable coping to some extent with some climate risk events happening. [A.7-1] (30m00s) Temperature increase Sea level rise changes in precipitation [A.7-2] Within climate change the increase in temperature is particularly of concern in the southern hemisphere, given emerging economies in Sub Saharan Africa and low lying literals all around the world seem to be most affected. Related to that the increased ice melt that can have a devastating effect on sea level rise and global ocean currents, which affect all of our weather patterns. We are talking in that sense about quite major changes and quite severe risks to supply chains. I dont think you could rule out any part of the world not being affected by that. On the mega scale rise in temperature is the really critical indicator towards a long term climate effect, impacting a lot of emerging economies. Just looking at how much is produced by emerging economies for the major markets in the US and Western Europe that could have quite a major impact. One of the things we have seen in recent years is a change in precipitation levels, again particularly affecting the southern hemisphere where they have gotten quite dry weather with rainfall levels having dropped off in recent years. Precipitation levels could as such be a good indicator as well. [A.8-1] (36m44s) Take into account in existing categories [A.8-2] I think you have to look at it in two ways; one is looking at the risks in the internal supply chain, within your organization, and the other is Page 197 looking at the risks to the external supply chain, both upstream and downstream. I would not separate climate risk indicators into their own specific risk category, apart from the other supply chain risk metrics you put in place. You need to build them into your total supply chain risk metric model. Your climatic and environmental risk analysis and risk indicators need to be built into the supply chain risk model from the source of your raw materials up to the end customer. If you are closer to the supply side youd probably more concerned on what happens downstream, what will stop you from delivering to your customer. If you would take the standard production company, sitting quite central in the supply chain, then they are going to be equally concerned downstream as well as upstream when it comes to climate risk management. I dont differentiate between supply chains and value chains; in the SCOR model re-use, after-sales service, etc. also relate to organizations supply chains if that is part of their service package towards their customer. [A.9] (42m52s) Comment and discussion on getting questions in advance. Comment and discussion on assumptions made in the research! Interview 8: Gyngyi Kovcs Time of interview at interviewers location: 16m55s Time of interview at interviewees location: 11m55s Date: 7 November 2013 Place: online - Skype - done from Bangkok, Thailand Interviewer: Dennis Bours Interviewee: Gyngyi Kovcs Gender interviewee: Female Position of interviewee: Erkko Professor in Humanitarian Logistics at Hanken University Helsinki, Finland, and Director of the Humanitarian Logistics and Supply Chain Research Institute (HUMLOG Institute). Page 198 Answers [A.1-1] (3m55s) Yes. [A.1-2] Humanitarian supply chains generally deal with these issues as raison dtre and they really have to adapt to any changes in their environment. If climate change has an impact on weather patters, or the impact on certain disasters, then the humanitarian supply chain also needs to adjust to that and preparedness has to account for those types of impacts. Now if I think of the commercial supply chain then the overall answer would be yes. They have been impacted; there have been a number of quite extreme, larger than predicted, floods. Due to climate change these floods deviate from the previous norms, regarding their size and predictability. Some of these floods have for example had quite a severe impact on particular companies and as companies are linked together in a supply chain that has an impact further downstream in the supply chain as well. Climate change is predicted to impact on two particular weather events; one is floods and the other one is severe storms and their increase magnitude. In Finland we have also seen an increase in preparedness for example in the energy supply chain, where there are quite some endeavours to for example put electricity lines in the ground. Another example is the forestry supply chain. [Note of interviewer: The answer is yes for both humanitarian and commercial supply chains, given the question is whether they have been impacted, not whether one is better prepared than the other. Though good discussion to add to perhaps learning lessons for humanitarian supply chains] [A.2] (6m42s) The Thailand floods and Japanese tsunami and how that impacted generally on the electronics supply chain and how that impacted the pricing of electronic products. [A.3-1] (7m32s) lack of materials, delays, no service provision all together, reputational consequences Page 199 [A.3-2] The extent to which they have been impacted depends a lot on their preparedness, their current state of resilience and how the supply chain has been set up. From my experience the very lean supply chains with very little to no alternatives in terms of different suppliers, places of sourcing, and so forth are typically impacted harsher by climate risk events. Because any type of disruption quickly impacts them much worse than others. The impact could be anything from disrupted supply, which could factor down to not being able to deliver at all assembly lines coming to a stand still resulting in reputational consequences. I guess supply risk is probably the hardest issue. [A.4-1] (9m08s) No, not necessarily [A.4-2] Of course over a large sample you would get some sort of consensus with a scale like that. The problem would perhaps be bigger if comparing various types of risks, but even objectively comparing one type of risk between locations can be difficult with such scales. For example within the EU there has been an endeavour to classify particular meteorological hazards in these types of risk scales and it has been extremely difficult to come to any kind of agreement on them because particular regions are exposed to certain hazards more than others and they then perceive those hazards very differently. Any kind of scale like that is a perception scale and risk perceptions have a lot to do with cultural differences, the history of the respondent and his exposure to particular risks over time, which could result in complacency. When one person would do the scaling for various locations it might make the scales more comparable, but not necessarily more accurate. [A.5-1] (12m00s) Delay (time), Lead time variation (time), Unpredictability of lead time variation (time) Cost of switching supplier Cost of building up supplier Loss of life Labor standards Employee safety Page 200 [A.5-2] From a supply chain perspective there are KPI I could think of and one is of course delay. But typically delay in a supply chain, being within a range that is covered by safety stocks or alternative suppliers, is less of an issue if you know it early enough. The variation of lead times is the one that causes more havoc in a supply chain. Again, if any kind of event triggers some sort of unpredictability or lack of probability of lead time, that would have an impact on the supply chain. Whatever your unit of comparison will be is something you need to agree on. Lead time variations can always be converted into dollars if you would want to. Another issue that comes to mind would be if a supplier completely seizes to exist, resulting in the cost of switching suppliers or building up the supplier again. If the supply chain has the aim of community involvement, like is the case in some agri-food supply chains like coffee or coco, then the consequences related to the loss of such involvement due to a climate risk event would be hard to calculate. There are other factors that impact the supply chain that cannot be calculated into financial figures. For example the current debate in Sweden on textile supply chains labour standards and child labour, which has a big impact but cannot be calculated into financial figures. This is related to the supply chain strategy and if the strategy is to be an ethical supply chain or fair-trade supply chain, then labour standards or loss of life is at the core of such a supply chain. CSR is a bit of a tricky one; in the northern part of Europe CSR is seen as an accountability issue, while in the southern part its seen as a PR issue. [A.6-1] (19m20s) Yes. [A.6-2] As long as climate change has a certain impact, on a supply chain, locations, facilities, choice of suppliers and so forth it should be taken into consideration. From my personal perspective I would say there have definitely been more extreme weather events over the past ten years, but ten years is not really a representable sample from a climate science perspective. Page 201 It is not necessarily only the number and intensity of risk events increasing, but also the risk consequence. Leaner supply chains, urbanization, population growth, a changing social fabric and environmental degradation all increase the consequences of a risk event, the effect it will have. [A.7-1] (25m14s) weather variation extreme precipitation Temperature variations wind variations [A.7-2] These are multi-dimensional indicators, typically ratios that evolve over time and you would really need to see the patterns and evolution. Various types of weather will impact different elements within your supply chain and the consequence will be very much industry dependent, so it will take a good number of experts and quite a significant amount of time to come up with any of such indicators for any specific supply chain. If you would be looking at an agricultural supply chain pretty much any type of weather variation from the norm will have an impact one way or the other. If you think if manufacturing industries, floods would impact, storms taking down electricity lines, anything that interrupts the energy supply will have an impact precipitation, temperature and wind variation, depending on the type of energy produced. [A.8-1] (30m04s) Take into account in existing categories [A.8-2] Usually singling out any kind of category might lead to oversight of it. It usually makes more sense to integrate them into existing categories, into each one of them where they have an impact, because they then become an integral part of risk management in a supply chain. If its a separate category that no one understands and no one will actually react on it. In the case of sustainability you see a Chief Sustainability Officer and no one really understands what the person is doing, while sustainability should become an integral part of the organization. The importance of including them either upstream or downstream really depends on where you are situated within the supply chain. If your Page 202 company is the final assembly then anything upstream will have an impact. If your organization and supply chain operate globally, or you are operating in locations often impacted, then such organizational factors become more important than the focus on either upstream or downstream. [A.9] (34m15s) Very interesting to read. Interesting that in a way you write more about general risk management than a focus on humanitarian supply chains. This is one of the types of reviews our journal might be interested in. To be discussed! Have a look at: ASEAN joint supply chain disruption plans. Talked about: - HUMLOG has a project on climate risks and how it factors into humanitarian logistics. - Shortly talked about corporate-humanitarian collaboration, especially in first response with local companies. They might not be able to carry on response for a long time though, given their stocks run out. Questionnaire: include suggested KPI and see how people react! Interview 9: Colin Airdrie Time of interview at interviewers location: 14:16 Time of interview at interviewees location: 14:16 Date: 12 November 2013 Place: online Skype. Interviewer: Dennis Bours Interviewee: Colin Airdrie Gender interviewee: Male Position of interviewee: Managing Director of LBA (Logistics Bureau Asia) Consulting Ltd. Bangkok, Thailand. Answers [A.1-1] (5m55s) Yes, extreme weather events [A.1-2] Im not convinced about the whole influence of human impacts on climate change, however I think supply chains have been impacted by extreme weather events. But whether these extreme weather events are due to human influenced climate change is too early to judge. Page 203 I accept that the climate is changing though Im not sure whether it is mainly due to human factors as being discussed or a natural cycle. I tend to keep a short-term view on this and focus on extreme weather events, given that the climate change discussion makes no difference to the need to risk manage the increase in extreme weather events and their impact on supply chains. The big climate event here in Thailand were the Thailand floods in 2011, though a lot of the risk consequences were due to bad water management rather than primarily climate risk sources. [Note of interviewer: (10m00s) Good side-discussion on poor development of supply chains in general] I am very conscious that I might come across as very negative about this but in my work in the last 17 years - particularly in Southeast Asia and China - I have seen supply chains that are incredibly badly developed, even with some of the large multinational manufacturers in-country. Where you got supply chain management - and good management examples are difficult to find that looks at transport as a commodity in which you go for the cheapest option, are they going to worry about climate change or extreme weather when they dont care about their sheer bad management on a daily basis? I think that what youre looking at is very credible and it has an application when youre talking about companies that have been very supply chain aware already for some time. But Im not sure to what extent the average supply chain allows you to be so robust. Im not talking about small local companies with local supply chains, but about big international companies with locally managed, locally owned in- country supply chains. Their supply chain management is just awful. How can they implement this when they barely manage to decently plan their transport or manage their warehouses? [A.2-1] (14m20s) Thailand floods Southern Thailand monsoon impacting infrastructure towards the peninsula and Malaysia Page 204 [A.2-2] Almost every year the roads down to Southern Thailand get hit by the monsoon. That does not only impact the supply chain to Southern Thailand, but also the cross-border traffic both road and rail that goes straight into Malaysia and Singapore and related international seaports. [A.3-1] (15m55s) termination of operations cost of substitution / alternatives delay of deliveries [A.3-2] My main experience is with the Thailand floods, which completely stopped operations in modern trade retailing of big companies. No one had really done business continuity planning they are all doing it now The thing was; The place selected for their distribution centres, Wang Noi, was the ideal hub in terms of transportation and distribution both nationally and into Bangkok is in the delta of the Chao Praya river and in a floodplain. The area does flood and so the industrial estates up there are designed with big walls around them and pumping stations, but not designed for a flood that big. They might well have been designed to be able to cope with the climate, but they were not designed to cope with inefficient water management at the dams. Tescos distribution centres in Wang Noi were flooded so they rented the Bitec exhibition centre in town to use it as distribution centre. I talked to the country manager of Linfox, an Australian supply chaining company focusing on Asia, and he told that even when the floods subsided and warehouses were dry the journeys would still take three times longer due to some roads still being partially flooded. I think that since then there has been a big move by companies to focus on business continuity management and look for alternative sites. [A.4-1] (21m45s) Yes [A.4-2] Taking the example of flooding again, streets get flooded in Bangkok with a big rain but it also drains quickly. It happens several times a year during the rainy season, but has little impact. On the other end of the scale you have big floods, also water where it shouldnt be, but you might in another location get stranded for months. When picking locations Page 205 for distribution centres, doing a network analysis and having a risk matrix on flooding risks, then that helps to make decisions. I had a client whose business was badly impacted by the floods. They were looking at splitting their distribution centre, but it still needed to be close to Bangkok due to 70% of their business being in Bangkok. Apart from building or renting a second distribution centre they would have the extra cost inventory of a same range of products and extra transport, which resulted in 1.4 to 1.7x greater cost for inventory holding. The question is whether this extra cost towards contingency planning is justified, or you just live with the cost of a massive flood every so often. The reason that the insurance industry is only taking off now in Asia is because of the thought in Asian cultures that if you insure for or prepare for some risk event you are inviting it to happen. Were not going to spend money on that, because it invites faith that would make it happen. [A.5-1] (29m05s) Cost of termination of operations Termination of operations (time) Cost of substitution / alternatives Delay of deliveries Cost of reduction in customer base [A.5-2] We are thinking here about how extreme weather events impact your supply chain. It could be that the factories, distribution centres and logistics are fine, but the customer base is affected by a climate risk event. So it wont have a direct impact on your own infrastructure or inventory, but it impacts your sales. The customer base is part of your supply chain but we often only think about adverse conditions impacting the infrastructure of the supply chain. It might be that thats fine, but it cant reach the customer. [A.6] (31m02s) Yes [A.6-2] Yes, but only because they have been of no concern, because they have been neglected up to the last Thailand floods. My concern with Asia is that such events could have been avoided and people need to take note of that. Land prices close to the highway to the South are now going up, because the land is outside of the floodplains of the big rivers and it Page 206 normally doesnt get flooded. The companies are willing to accept the extra transportation cost. [A.7-1] (33m22s) Floodplain risk rating Precipitation on micro-climate level Geologic maps (added at end 57m41s) [A.7-2] What is the risk of flooding in certain areas? Thats not a new science. Mississippi areas flood all the time with a certain degree of risk related to specific areas. That would also need to be applied to Asia. In earlier flooded areas you see the markers or where and how often floods came to certain levels. Its based on history and gives some level of indication on what you need to think about in the future. Though there isnt a clear predictive element in it. Even in a tropical climate like Thailand with fairly regular rainy periods, each year is completely different and there is no indication whether there will be a big flood or not. You have to look at these things, humidity and precipitation developments, on a micro-climate level to get a useful level of accuracy. [A.8-1] (39m25s) My immediate reaction would be: Specific climate risk category. [A.8-2] A separate category for climate risk indicators adds an extra dimension if somebody would wish to take them into account. All the other risks can be managed or influenced, or at least to some extent, while you can have little to no effect over the climate or weather. You have to manage the consequences more than the risk event itself. It adds more weight to climate risk indicators if they have their own category and if you would add them to other categories it submerges them and you cant see which is the rogue factor in the category. [Note of interviewer: on taking ownership on risk indicators and good story about feng shui] One of the problem in Asian management is that people dont make decisions, because if you dont make a decision, you dont make a mistaken and you wont get punished. Dont think managers will take ownership of risks! Page 207 I once helped to design a distribution centre with the doors coming out to the North, given the typhoons came in from the Southeast, from the South China sea. But because doors on the Northern side were bad feng shui they placed them on the South side of the building and designed them to withstand a strong typhoon. Two weeks after opening, in comes a typhoon stronger than what was calculated for and it blew out the doors. No one had told that typhoon about feng shui. These are the influences in Asia that keeps people from making rational decisions and taking responsibilities. [A.9] (47m55s) If you watch Top Gear, they all deal with Mercedes, Maserati and Bugatti Veyrons, but the vast majority of us dont come near that and are lucky with a Ford Focus. This very good higher level thinking has to be brought down to operate at the practical level. Practical recommendations should be towards specific supply chain jobs, like towards the design of transport infrastructure or warehouses. One of the reasons Thailands flooding was so bad, and will not get any better in the future, is that during the build-up of the Thai economy over time all the natural floodplains of Thai waterways got developed. The recommendations should perhaps not only talk to the supply chain community, but to the whole economic community. The ones currently thinking about business continuity management and climate risk management are the bigger companies with the most to lose. I would make your questionnaire a bit less general and come to some questions that also perhaps pinpoint towards experiences. Interview 10: Michael Keizer Time of interview at interviewers location: 11:00 Time of interview at interviewees location: 6:00 Date: 13 November 2013 Place: online Skype. Interviewer: Dennis Bours Interviewee: Michael Keizer Page 208 Gender interviewee: Male Position of interviewee: Consultant Logistics for Global Health and Aid with, among others, The Global Fund Melbourne, Australia. Answers [A.1-1] (8m46s) Yes, definitely [A.1-2] That is almost a truism; Of course they have been impacted. The more interesting question is perhaps whether they have been more impacted than in the past. My personal experience there is that they do seem to be more impacted, especially with flooding, high precipitation levels that impact the supply chains I have been involved in. The longer term climate change by definition is slow and the changes are incremental, which makes it difficult to see them from year to year. If you would have some kind of baseline measure of 20 years ago then possibly you could see a difference. I would not be surprised if there was an impact of climate change on supply chains, but I personally dont see it because the changes from year to year are incremental. [A.2-1] (10m53s) East Congo rainy seasons impacting humanitarian supply chains Zimbabwe drought impacting demand South Australian 12-year drought and bushfires Australia 2010-2011 floods [A.2-2] For me it is especially about flooding and precipitation patterns. As an example; Im looking here in the South of Congo and we have been lucky in our prepositioning in advance of the rainy season. This year we were a month early, for various organization-internal reasons, and that was very lucky for us, because the rainy season started much earlier this year. As a result the roads were impassable much earlier in the rainy season than normal. The precipitation also seems to be much more severe than usual. Another example; I was in Zimbabwe last year where we had a rainy season that started much later and ended much earlier than normal, basically resulting in a drought. This resulted in a much longer famine gap with clear impact on the health status of the people there. Page 209 Another clear example from my home base, from Australia; The South of Australia, up to three years ago, suffered through an 12-year drought, which is the longest drought in written history in Australia. This had very clear results, like incredible bushfires with quite a number of casualties. And then suddenly three years ago the drought broke and we ended up with huge floods in South Australia. What you see is more extreme precipitation patterns, both ways as in more flooding as well as more droughts. [A.3-1] (14m25s) Demand impact Decreased accessibility [A.3-2] The impact of various risk events over the past years shows how resilience plays a role there as well. When you look at the droughts in Southern Australia lasting for 12 years the theoretical impact would have been much more severe than the drought in Zimbabwe last year that lasted only a couple of months. But in the end the impact in Zimbabwe was much bigger, mainly because the Australian systems, including the logistics systems, were much more resilient being built to deal with it. Even though the seriousness of the climate risk event in Australia was much larger than the one in Zimbabwe. Added to that, the impact on the demand side was much less in Australia, because also the demand side was much more resilient in Australia; people were not immediately pushed to the brink of starvation, like in Zimbabwe. Yes, in principle the direct impact on supply chains was big for all the events I described, but how it in the end impacted on the performance of the supply chains was very different. [A.4-1] (17m10s) No, subjective [A.4-2] It is difficult because quite often the assessments are subjective. What does minor mean? What does severe mean? First of all, there are no generally accepted scales of risk consequences. And secondly, it is probably even more subjective than the likelihood of risk events occurring. Page 210 When you talk about likelihood of risk there are fairly objective scales, but when you put the likelihood of an event into such a scale it becomes subjective again. When looking back, the likelihood of something happening, the likelihood of an early rainy season was about 10%. But does that mean that the likelihood of future early rainy seasons is 10% as well? That is where subjectivity comes into play as well. It is Niels Bohr who said: Prediction is very difficult, especially if it's about the future (Niels Bohr, Nobel laureate in physics) Yes, risk consequence scales might help on a conceptual level for discussions. But whether they really help in practical risk management is an open question. A lot will depend on the assessors of the risk matrices and on the level of acceptance of the findings by the audiences for such risk matrices. [A.5-1] (20m35s) Increased vulnerability Increase in disruptions (time) Increase in supply-demand mismatches [A.5-2] It is easy to quantify past events, both frequencies and impacts, but it is a lot more difficult to say anything about future ones. It is all about different perceptions of both likelihood and impact of risk events, which is also what the whole political discussion hinges on. As far as my knowledge goes it is not really possible to make precise, pinpoint assessment of both future likelihood and impact. However, what we can do is that we approach it in a more stochastic way and look at likelihoods of likelihoods of occurrence and consequences. What you then get is possible intervals with their individual likelihood and depending on the interpretation of data you will then get a wide range of possible intervals. Also when you look at risk consequences you will have different interpretations, different opinions as well, which is where the subjectivity comes in. For example, if we talk about an event like the 12-year drought in Southern Australia, what sort of impact will that have on the supply chains? Well, there are quite a number of different interpretations on that. The most pessimistic ones see an increased vulnerability in case we have a similar Page 211 event again, for instance because fuel supply lines have become more stretched over the past 10 to 15 years. The most optimistic ones say that the moving of physical goods has become much less important and we have become a more service oriented virtual society. Both likelihood and risk consequences are open to different interpretations and there is quite a lot of subjectivity coming in there. Thats why I think those risk matrices are nice to use as basis of a conceptual discussion, but these are practically very difficult to use. It is in general very hard to subjectively measure risk consequences. We can measure the past, but that does not mean that this will be the same in case of a future risk event maturing. [A.6-1] (27m30s) Yes [A.6-2] In theory I would say no, because if you have not taken it into account in your risk management yet then youre very late. The reality is that there are still organizations who havent, so yet it will probably have to be of a growing concern. I would say that the organizations who have not taken climate risk consequences into account in their risk management yet are pretty late and probably too late. [A.7-1] (29m17s) Changes in precipitation patterns Changes in wind patterns Changes in occurrence of extreme winds, typhoons/hurricanes [A.7-2] There are so many possible indicators and it totally depends on the context of the company. The indicators for Philips would be very different from indicators for Amazon to take two organizations. Even within one sector there can be differences, depending for example on where your facilities are located. So yes, there can be many risk indicators but they will totally depend on your specific situation. The risk indicators I am looking at in my specific situation are changes in mid-term (6-months to 2 years) precipitation patterns, which is in my case the most important one. Another that is very important for many organizations in the South of Australia is precipitation patterns in the long term, being 1 to 10 years. Page 212 A friend of mine works in shipping and one of the things he looks at are changing wind patters, especially extreme wind events like typhoons and hurricanes. I like the examples you gave in your Annex of differences in impact of the flooding in Thailand for two different hard disk manufacturers. [Note of interviewer, for coding: The focus of this question was meant more to focus on indicators to be used to add some level of predictability of climate risk events to a risk management process] [A.8-1] (33m20s) No specific climate risk category [A.8-2] I think they should not have a specific risk category because they impact on every other risk category. In general, categorization of a risk helps when you start inventorizing your risks; it helps with coming up with risks. But as you get further down the road in your risk management the categorization becomes less important and less relevant because many risks impact multiple categories. Climate risks probably impact almost any category of risks you would come up with, which is why they definitely should not have their own category. This is probably true for other types of risks as well, for example strikes. They impact many categories as well and in that sense climate risks are not really unique. [A.9] (35m00s) Literature review: - References difficult to follow at times - Ibid used wrongly - Levels: natural environment as denominator of Level 4 - Perhaps cut up compound statements - Add avoidance as operational risk mitigation strategy Different in getting out of certain risky operational areas. Add resource link to it, in which avoidance is mentioned as risk mitigation tactic. - Risk management definition not the only one! Perhaps look at wider risk management definitions. Explain why I do take this definition. - Expansion of research design in progress. Also the element on the literature review needs more foundation on the academic why behind a choice for a literature review and its merits. Page 213 Interview 11: Steve Leon Time of interview at interviewers location: 22:02 Time of interview at interviewees location: 10:02 Date: 22 November 2013 Place: online - Skype Interviewer: Dennis Bours Interviewee: Steve Leon Gender interviewee: Male Position of interviewee: Clinical Professor of Supply Chain and Operations Management, University of Central Florida Orlando, United States Answers [A.1-1] (13m32s) Yes [A.1-2] In a typical supply chain perspective we have multiple tiers or so, but my perspective in the airline industry focuses on transportation and as such on a specific tier of companys supply chains. [A.2-1] (13m45s) Snowstorms shutting down airports in the Northeast of the United States Hurricanes Indonesian tsunami Japanese tsunami Thailand floods [A.2-2] My background is in the airline industry and we routinely get hit by weather events, such as snow and northeasters, which shuts down airports in the Northeast of the United States. Earthquakes on the West coast of the United States [Note of interviewer: For this research climate change and earthquakes are not seen as inter- related, given the science on the impact of climate change on earthquakes is still in its infancy]. Hurricanes will also typically impact the airlines industry. We had the Tsunami in Indonesia and the Tsunami in Japan and that closed airports and domestic as well as international flights, both for passengers and cargo Page 214 Flooding in Thailand impacted the supply chains of hard disks, computer equipment worldwide and automobiles in the Asian region EU carbon emission tax on airlines. http://ec.europa.eu/clima/policies/transport/aviation/ I think when looking at the longer term climate change we dont know yet how supply chains will be impacted. But when thinking about the EU tax on carbon emissions, there was talk by UPS and a few other airlines about rerouting or changing their network and schedules to accompany these taxes. What I mean by that is not so much to accommodate, more to be punitive in their actions and for example planning their flights around the EU. There were airlines in the Middle East that were thinking about not flying into the EU any longer, in protest of these taxes. I think it was China who threatened to pull out orders from Airbus due to talks about these carbon emission taxes. I can see some of these treats becoming realistic, come to fruition. The International Civil Aviation Organization (ICAO), http://www.icao.int/Pages/default.aspx from Montreal, Canada, is working with the UN and EU to collaboratively develop consensus on what is fair to all. World governments are now working together to have a global acceptance on a policy that is developed with the consensus of most governments. [A.3-1] (19m55s) Lost revenue Increased cost Metrics of delivery % of not on time delivery [A.3-2] The impact could be measured in lost revenue, maybe some increased cost. You could measure using metrics of delivery, like % of not on time delivery due to impact of weather. I suspect there are financial measures and operational measures. This is what so forth comes to mind. [A.4-1] (21m20s) Yes, but not objective. As such, No, not objective Page 215 [Comment of interviewer: So answer on question is No, given the question asks whether it allows for objective results and comparison] [A.4-2] Sure. The benefit of a scale as the one you talk about is that in a practitioners sense it is easy to use. I think consequences is a big factor in determining the mitigation techniques. But you are asking whether it is an objective tool, can it be objectively used Well, in a sense not so much, because what is severe to one is not so severe to another. I think if you were to categorize the events by an independent party, or a party on whom we all degree as having some sense of what severe, moderate and negligible is, then I think you could be objective. But if we ask individual managers from different companies, from different parts of the world, then I think what is negligible to one might not be so negligible to another. I think because of the nature of the business, different regions, different cultures, and different industries we are in you possibly have to narrow down such a scale to region and industry to get a slightly more standardized scale. For example, in North Dakota we have no problem in getting around with snow and ice. If you would have the same amount of snow and ice in Atlanta, the whole city shuts down. In that sense it is more subjective than objective. But the tool is very useful though. I teach it in class because it is a great tool to use. My feeling is that when looking at one event across multiple regions is probably more subjective than multiple events across the scale, given you have their relative distance from one another on the scale. [A.5-1] (25m30s) Overall lost revenue Lost revenue is certain business segments % of loss against a certain consumer-base [Note of interviewer: I will see this as market share related.] Decline of stock values Lower return on assets Effect on inventory turnover Increase in insurance premiums Cost of risk mitigation actions Page 216 [A.5-2] Sometimes people include communities in their supply chain. If youre working in a community then those communities you work and live in can also be impacted by what happens to a company that is in a supply chain being impacted. If we look at a supply chain and include the end user, if were looking at ways to quantify the impact, then you could look at financial impacts. When you look at financial impacts you can have an overall grand scale like overall lost revenue, or you could talk about revenue loss in certain business segments, or % of loss against a certain consumer-base. You can go further beyond revenue and cost; which cost is involved? Is it operational cost or cost we may see through how it affects stock prices. PWC did a recent study on how disruptions affect the stock prices, and return on assets decline. I think it is a tough one. If you can come up with good metrics on how to measure such consequences that would be really good. You can look at the metrics the finance industry would use when they evaluate a company, such as inventory turnover. Insurance would probably be a factor. Maybe also look at the implementation of risk mitigation programmes. The cost of hiring experts etc. to implement risk mitigation actions. The implementation of new policies and legislation, but how do you measure new legislations in companies Im not so sure yet? Perhaps a cost increase due to wages and salaries and so forth. If you take people away from the current job they are in and you take them over to implement new legislation or risk mitigation actions, maybe their work focus being diverted would result in cost or reduced sales, or reduced ability to innovate because people work on other things. [Note of interviewer: I will take these consequences as cost of mitigation actions] [A.6-1] (32m45s) Yes. [A.6-2] I think climate related risks were already a concern, and they were neglected! I think what happened is that people realized events could occur, they could be bad, however there wasnt a reason to focus on them until recently now that companies are being hit harder by climate risk events. No Page 217 one cares until your bottom line is being impacted. And companies now find that their bottom line is being hit. It was a concern but it was neglected only because that maybe at that point in time it was too costly to implement any mitigation techniques, or there was no need because the company had not experience climate risk events. But now every conference has something about risk mitigations, about carbon emissions, about new legislation and taxes towards environmental factors. Its so big now you cant ignore it, and if you are ignoring it you will probably be out as a company. [A.7-1] (35m56s) Extreme weather trending Extreme weather trending + adjustment for increase Hurricane and typhoon build up [A.7-2] What could we use? If you look at something that would indicate climate change or extreme weather That is very difficult in that they are typically rare events. In the Northeast of the United States though, there is usually a mayor snowstorm, so there is a high probability that one of those is going to occur. But when is it going to occur? I think what you could do is to mark trends. One of the figures in your paper shows that; it shows man- made and natural disasters and how they are increasing. You could narrow that down to region and track trends. It would give you some idea about whether they would occur, though the hard part is to predict when they would occur. Youd certainly need to do some major statistical analysis. We might need to look outside of our field to get the information we would need for climate risk prediction. For instance geological maps could be of use. We might need to look at people who have some expertise with eartquakes, tsunamis, hurricane prediction and the like. One good thing of hurricanes is that they need time to build up, so you know that they are coming. For instance in the United States we have hurricanes that come up through the Gulf of Mexico and we have hurricanes that hit the Southeast of the United States. In those instances you know they are coming and you would want to plan for them; you might want to build more inland. Or it might mean that if you like to setup in a particular Page 218 area that what you are building needs to be reinforced in a certain way to withstand the impact of extreme weather. Going back to my original statement; We might just have to go outside of our field, because we do not have the expertise to predict these extreme weather events. We need to talk to scientists and ask them how they predict, because there must be tools to identify triggers. What do scientists look at to identify whether a tsunami is coming? And is there a feed, is there data online that can be tracked? There is a research institute out of Belgium that provides a database of all natural disasters. Now that is historical, but it may give some indication on how that data could be aggregated to more localized data. Disaster Database: http://www.emdat.be/ To take the example again of hurricanes in the Southeast and coming through the Gulf of Mexico. They occur frequently, and the come to shore frequently, and they do so in an area of about a 100 mile span. While you dont know the pinpointed location of landfall for future storms, when creating your facilities, planning your nodes, but you know the area in which they do come to shore. If you are in that area you can be pretty sure youre going to be hit by something, and on the other hand if you would move out of that range the likelihood of being hit is much less. Maybe some of the historical data will lend itself to supplementing other data. [A.8-1] (44m50s) Take into account in existing categories [A.8-2] On one hand, if youre looking at carbon emissions and legislation and taxes. If youre looking at disruptions due to climate factors No, I think you should fold it into the existing risk factors to tell you the truth. If were looking at transportation risk, part of that would be whether your transportation supplier is going to be able to come through for you. When looking at your transport suppliers while doing your due diligence, youd be looking at a whole host of things. Not just their on-time performance, but their quality, ability to deliver, financial position and you should also look at their ability to perform under extreme weather conditions. Page 219 I dont think you need to break it out as a separate metric. The climate part falls into other categories as part of their due diligence as being another risk factor you have to look at when making decisions about demand forecasting, transport, etc. Some companies are coming up with sustainability and climate metrics that take on their own life, but maybe these companies have a higher CSR vision that makes these indicators stand out. Outsourcing as abdication of management responsibilities is old-school. I think that these days you have to pay attention at what you outsource and to who you outsource. We teach to look 3 to 4 tiers back in your chain. Well, if youre a smaller companies and dont have the resources to take care of something, then maybe you do outsource functional areas and not pay attention too much. [A.9] (56m36s) Literature review: Very thorough Questionnaire: Risk appetite. Where does their risk mitigation action stand vis--vis their risk appetite. Also: define the terminology used in the questionnaire. Interview 12: Sander de Leeuw Time of interview at interviewers location: 16:00 Time of interview at interviewees location: 10:00 Date: 2 December 2013 Place: online - Skype Interviewer: Dennis Bours Interviewee: Sander de Leeuw Gender interviewee: Male Position of interviewee: Associate professor of Logistics (Vrije Universiteit Amsterdam, The Netherlands), Professor of Operations Management (NBS Nottingham, United Kingdom). Answers [A.1-1] (5m43s) Yes Page 220 [A.1-2] Yes, they have been impacted. The question of course is whether it is more or less than in the past. My feeling is that we dont know whether supply chains have been impacted more or less than in the past. I see a lot of people who say it is more, but I strongly doubt that. The reason for that is that supply chains have become more international so they become more vulnerable. The fact that there are more supply chain problems is not due to the fact that the climate is changing, but rather a consequence from the fact that our supply chains have changed. Supply chains being impacted is more an element of the increased vulnerability of supply chains due to their length. They probably have been impacted more than in the past due to their increased vulnerability. [A.2-1] (7m25s) Hurricane Katrina Japanese Tsunami Thailand floods [A.2-2] I think there are a few examples from quite a while ago. 2005 pops in my mind, hurricane Katrina and its impact on coffee supply chains in the US. The Japanese Tsunami three years ago had quite a big impact. Though a tsunami is a natural disaster, not necessarily a climate change or extreme weather event, followed by a complex or man-made disaster the latter probably having the biggest impact. Another one that is perhaps even more extreme and quite well documented is the flooding in Thailand 2011. A lot of hard-drive manufacturers were affected to the extent that it took one year for hard disk prices to come down and stabilize to the price level from before the flooding. The biggest issue was not increased precipitation, but how it all was managed by the Thai government. Because the Thai government wanted to protect some areas, they diverted the flooding through canals and worsened the situation for the area with the manufacturing of hard-drives. It is perhaps rather typical that the weather event of extreme precipitation is only one of many factors developing in a risk event. [A.3-1] (11m53) Consumer price of product Delay of product introductions Page 221 [A.3-2] In the Thai flooding case, the consumer price of a product is one indicator. The second one that happened in Japan after the Tsunami is the delay of product introductions. Apple actually delayed their iPad, which has to do with their main supplier I think it was Sharp is being located in Japan and could not deliver. The primary ones as such are cost and time. [A.4-1] (13m19s) No. [A.4-2] No. Just to give you one example; If you look at the earthquake in Haiti against the earthquake in Chilli. Earthquakes are very unlikely to happen and their potential impact is either quite sever or critical. However, the coping capabilities of Chilli were much better than those of Haiti. Other than that, Haiti was located on a mudslide, while Chilli has a rocky surface. The vulnerability of Haiti was as such much higher. I dont know if vulnerability is part of the potential risk impact, but we should definitely take into account the potential vulnerability. There is probably a higher level of comparability when comparing various risk events for one location, given the characteristics of a risk event and vulnerability are dependent on the location. If you look at earthquakes in Japan, people are very well prepared for that; buildings are earthquake resistant. Though dealing with other events in Japan might be a problem. [A.5-1] (15m30) Consumer price of product Delay of product introductions Cost / time of recovery [A.5-2] What you often see is that there is some sort of number, like the cost element of the societal impact. Quantifying risk consequences is always a tough one, given you have to wonder what to take into account and what not. But I would look at something like the recovery cost / recovery time for a society. That is something very problematic in the US, where you would not expect it. For companies its also a problem, but companies are a bit quicker; if you cant get your supplies through you find other ways. There is a good example of Toyota. They had a problem with a supplier making a very specific part called a p-valve. Their factory burned down, but Toyota was Page 222 able to very quickly engage other suppliers. So the company effect was rather limited. Also when you look at the figures of down time for companies like Toyota and Honda as a result of the Japanese Tsunami that was considerable. But we actually looked at what the result or the impact of the Japanese Tsunami was on good flows of DHL. When you looked at their import and export figures they were hardly affected. They were impacted for two days and two days after the tsunami hit they were actually back to normal. Somehow they were very well able to quickly recuperate. Whereas society will take a long time. Then again, Japanese society is probably much better prepared for such events than the United States when you compare the two. [A.6-1] (18m22s) Yes. [A.6-2] The reason for that is that supply chains these days are very long and involve many suppliers. It simply has to do with the fact that we decided to outsource and offshore many activities over the past 20 years. And therefore risks are very important. It doesnt have that much to do with climate Im afraid. It perhaps has to do with climate risk events being compounding factors on a very much stretched and thus increasingly vulnerable supply chain. [A.7-1] (19m56s) Weather forecasting [A.7-2] I think we need to discriminate between climate change and weather events. Weather is more the short term. I dont think climate change is of any interest to companies. Unless youre in the weather business sorry to be bold. I think what happened in the US during hurricane Katrina is that Wallmart had its own unit to forecast what was happening with the storm and these days its actually possible to forecast the path of a hurricane 5 days in advance, which enables you to evacuate well in time. Also here in the Netherlands you can divert your goods flows based on weather forecasting, e.g. if there would be a big storm coming up were not going to moor a ship in Rotterdam, but divert it to Hamburg. Five days gives enough time to do that. Unfortunately in the Netherlands we cant Page 223 evacuate the people because were a bit stuck due to the population density. Delft University has done some good work in that area. In the Netherlands we have a system and of calamity warnings and related governance structure, given we have a particular sensitivity to water problems. The weather forecasts are being sold to companies as well. That might be useful for identifying what the impact might be of extreme weather events on your own activities. Im not saying that companies should build up their own weather forecasting unit. That is information that can be bought if its available. But the translation of that into how they should act is something that they probably should invest in. Wallmart has done that, and many others Im not aware of probably have done that too. There is also a task for governments here. To cut a long story short; I dont think longer term climate change indicators are relevant to companies, at least not from a supply chain perspective. The translation of weather information into decisions is what companies probably should invest in. I recall one paper on translating weather information in decisions, though probably not connected to business but about forecasting floods in Taiwan. [Q.8] (27m06s) Could you come up with risk categories in which climate risk indicators are, or should be, taken into account? Or do you feel that climate risk indicators should have their own, or no specific risk category? [A.8-1] Taken into account in some categories, but extreme events being singled out. [A.8-2] I typically use the overview of Sunil Chopra and Sodhi (2004) from the SLOAN management review, and that has 8 phases. And if I think of it perhaps it is a bit of a chicken-and-egg problem. You should probably do both! There is a separate category in that overview for extreme events, but you will also find that some elements in the other categories, like supplier risks, are impacted by climate change or at least extreme weather events. I would single a few things out; extreme events is a separate category that you can deal with. But for the others - longer term climate change, I would not. Page 224 From a company perspective you should be able to say what are my dominant risks on my supply chain?. Lets assume Im transporting my goods from the Philippines into Europe. You want to look at potential delays, but I think you can be more concrete. The typhoon season is something that comes back every year and is something you can actually plan for. You can be very concrete on the impact this has on your own supply chain; you focus on whether you are geared up for the typhoon season instead of looking only at delay risks. The same is in Africa, where you have a dry season wet season weather pattern as well. If you have not done your distributions in Chad by June you have a problem because then the rainy season starts. You can gear up your supply chain for specific [extreme] events, which is where the added value is of having some of the elements as a separate risk category. [A.9] (38m08s) Literature review; Captures most of the things and most of the sources that I expected in there were certainly in there. Literature review: There is this nice 4 strategies document of Shell; the 4 Ts of risk management of Shell! [Note of interviewer: Review to see if it should be included in the literature review!] Comment on Figure 6: Risk matrix with the 4 colors: Disagree with the buffering and pooling, how it is located in the matrix. [Note of interviewer: possibly the figure is an example of a specific risk event, or of a specific location within a supply chain. Need to verify this and add it to the figure as a footnote!] An event on a global scale is very likely to happen. But the same event on a local level only has a low likelihood [Note of interviewer: In globally stretched supply chains it is equally true that the likelihood of occurrence of a climate risk event on a single node is rather unlikely, but the likelihood of a climate risk event impacting such a stretched supply chain somewhere, is quite likely]. Questionnaire: Perhaps leave out academics as questionnaire audience. Page 225 Adding a description of what a risk management system is (?) Standardized answer types! And questions from past research. Had a good discussion on risk exposure. Made a change more than marginally of impact. Page 226 ANNEX 6: Internet-mediated questionnaire introduction This questionnaire on climate proofing supply chains supports my thesis research towards an MSc in International Purchasing and Supply Chain Management. The full title of the study is: Climate proofing supply chains: Identification of climate risk indicators to improve the supply chain risk management process (SCRMP). The aim of the research is to study climate risk indicators as part of the Supply Chain Risk Management Process (SCRMP), with the aim to improve supply chain resilience towards physical climate change and environmental risk sources (i.e., climate risk sources); this is referred to as climate proofing. This study will be equally applicable to commercial as well as humanitarian supply chains. Dennis Bours, the researcher, has been working in global humanitarian relief and supply chain management for over a decade. His current employment focuses on measuring the impacts of programmes that are designed to address potential adverse effects of climate change. His MSc study stems from his professional experience and interests, and supports growing international attention to the possible consequences that climate change and extreme weather events pose for supply chain operations. Note that you do not need to be a supply chain or risk management specialist to fill out this questionnaire! This questionnaire applies to you if you would be working in any of the following fields: Supply chain, logistics operations / management Procurement, sourcing, or contract management Organizational risk management / Risk management Quality assurance / Quality management Corporate Social Responsibility / Sustainability Financial management / Financial decision-making Academic research on any of the above fields Consultant / advisory function to any of the above fields Page 227 Time: This questionnaire will take about 15 minutes of your time. It will start with five questions about the organization you are working for. After that, there will be six questions on risk management, followed by nine questions on climate risk events, their impact and risk treatment. The questionnaire ends with five questions about your work and position. The results: At the end you are given the option to provide your email address if you would like to receive a narrative report once the research is concluded in April 2014. This report will give an overview of the research results and recommendations on how this could inform your organization's risk management and supply chain decision-making. A special note for academics, consultants and advisers: On the following pages, a number of questions are specifically asking about 'your organization', 'your organization's supply chain and risk management' and 'your position'. If you are working, or have worked on academic research or as a consultant / advisory function towards an organization with a supply chain that has been or could be impacted by climate risk events, then think of that particular organization / supply chain you researched or provided consultancy services for. Any questions that specifically refer to 'your organization' or 'your position' then refer to the organization being part of that one research case, consultancy service or advisory role! Click the following button to start the questionnaire: Page 228 ANNEX 7: Interview-mediated questionnaire PAGE 1: Four questions about your organization Q.1. Which of the following best describes the sector in which your organization operates? (2 Answer columns, single choice, requires answer) Private Public (national and sub-national) Public (multilateral, inter-governmental, e.g. EU, UN) Voluntary, Non-profit, Non-governmental Academic, Research Q.2. Please select the specific sector best describing your organizations focus. (In case your organization operates in multiple sectors, indicate the main sector in which your particular business unit or department operates) (Pull down menu of ISIC Rev 4 codes, 376 single choice, answer required) A - Agriculture, forestry and fishing B - Mining and quarrying C - Manufacturing D - Electricity, gas, steam and air conditioning supply E - Water supply + sewerage, waste management and remediation activities F - Construction G - Wholesale and retail trade + repair of vehicles H - Transportation and storage I - Accommodation and food service activities J - Information and communication K - Financial and insurance activities L - Real estate activities M - Professional, scientific and technical activities N - Administrative and support service activities 376 ISIC Rev 4 codes are the International Standard Industrial Classification of All Economic Activities, Revision 4, as issued by the United Nations Department of Economic and Social Affairs (UNDESA) - Statistics Division. UNDESA 2008. Page 229 O - Public administration and defense + compulsory social security P - Education Q - Human health and social work activities R - Arts, entertainment and recreation S - Other service activities T - Activities of households as employers + undifferentiated goods- and services-producing activities of households for own use U - Activities of extraterritorial organizations and bodies Q.3. What is the size of the organization in which you work? (EC SME Standard, 377 2 answer columns, single choice, requires answer) Micro (1-9 employees) Small (10-49 employees) Medium (50- 249 employees) Large (250-999) Enterprise (1000 or more) Q.4. In which country / territory is your organizations headquarter based? (Pull down list of countries of the world, single choice, requires answer) PAGE 2: Risk management in your organization Q.5. Does your organization apply a risk management system? (2 Answer columns, single choice, requires answer) Yes No I dont know 377 The SME standard sets the European standard for business sizes. See EC 2005. The three official business size standards available are the United States, European Union and the Australian standards on business sizes, for which the European standard was chosen because it formed a happy medium between the Australian (smaller) and American (bigger) business size standards. Page 230 Q.6. Does your organization adhere to an accredited risk management standard? (Like the ISO 31000 risk management standard, or comparable) (2 Answer columns, single choice, requires answer) Yes No I dont know Q.7. Does your organization apply a supply chain risk management system? (A supply chain is being defined as a network created amongst different companies for producing, handling and/or distributing a specific product and/or service) (1 Answer column, single choice, requires answer, skip logic) Yes - My organization has a supply chain risks management system as an integral part of its enterprise risk management system. Yes - My organization has a supply chain risk management system separate from its enterprise risk management No - My organization is involved in supply chain activities, but has no supply chain specific risk management system No - My organization does not operate or is not involved in any supply chain activities I don't know Skip logic: If YES, software goes to next page, page 3. If NO, BUT HAS SUPPLY CHAIN ACTIVITIES, software goes to page 4. If NO, NO SUPPLY CHAIN ACTIVITIES or DONT KNOW, software goes to page 8. PAGE 3: Four statements on risk management [Skip logic applies from Q.7.] Page 231 Q.8. I have the authority to influence company policy on risk management. (Horizontal 5-point rating scale, single choice, requires answer) Strongly disagree Disagree Agree nor disagree Agree Strongly agree Q.9. I have the authority to make influential recommendations on risk management. (Horizontal 5-point rating scale, single choice, requires answer) Strongly disagree Disagree Agree nor disagree Agree Strongly agree Q.10. I have the authority to make changes to risk indicators in our organizations risk management processes. (Horizontal 5-point rating scale, single choice, requires answer) Strongly disagree Disagree Agree nor disagree Agree Strongly agree Q.11. I have the authority to make decisions based on risk reports. (Horizontal 5-point rating scale, single choice, requires answer) Strongly disagree Disagree Agree nor disagree Agree Strongly agree Page 232 PAGE 4: Climate risk events and supply chains (1/4) [Skip logic applies from Q.7.] Q.12. Supply chains in general have been more than marginally impacted by physical climate change and extreme weather events (to be called: climate risk events) over the past three years. (Horizontal 5-point rating scale, single choice, requires answer) Strongly disagree Disagree Agree nor disagree Agree Strongly agree Q.13. Has your organizations supply chain been more than marginally impacted by climate risk events over the past three years? (2 Answer columns, single choice, requires answer) Yes No I dont know Skip logic: If YES, software goes to next page, page 5. If NO, software goes to page 7. If I DONT KNOW, software goes to page 7. PAGE 5: Climate risk events and supply chains (2/4) [Skip logic applies from Q.13.] Q.14. Please select the main type of climate risk event that most impacted your organizations supply chain. (2 Answer columns, single choice, requires answer) Heat wave Cold wave Page 233 Blizzard / Snowstorm Drought Flooding Tsunami Extreme precipitation / Monsoon Hurricane / Cyclone / Typhoon Global temperature increase Global sea-level rise Q.15. How would you rate the impact of the climate risk event? (Horizontal 5-point rating scale, single choice, requires answer) Negligible Minor Moderate Severe Critical Do let us know why you have chosen this rating for the impact of the climate risk event! (Text field option to explain choice) Q.16. Companies have different levels of risk appetite. How would you describe the risk event that impacted the supply chain of your organization, from the perspective of your organizations risk appetite? (Horizontal 3-point rating scale, single choice, requires answer) Acceptable Tolerable Unacceptable PAGE 6: Climate risk events and supply chains (3/4) Q.17. Which 4 indicators best describe the impact of the climate risk event? (Select up to 4 indicators) (2 Answer columns, multiple choice, requires answer min 1, max 4) COST: Demand, customer-base related cost COST: Lost profit or lost revenue Page 234 COST: Lost revenue as % of total revenue COST: Cost of substitution or alternatives / Flexibility cost COST: Cost of supplier base issues COST: Value of production / cargo lost COST: Value of damage to facilities / assets COST: Loss of market share / decline in stock value COST: Increase in insurance premiums TIME: Lead time, schedule consequences, delivery delay TIME: Time lost during climate risk event TIME: Time to recover OTHER: No service provision all together OTHER: Exacerbation of natural resource shortages OTHER: Trust, reputational and social consequences OTHER: Loss of life OTHER: Employee safety OTHER: Efficiency of response / responsiveness Another indicator not mentioned (Please specify): (Text field) Q.18. What type of risk treatment was put in place to tackle this type of climate risk event? (1 Answer column, 2 answers maximum, requires answer) Do nothing - no actions were put in place Crisis management after-the-fact Contingency planning / Business continuity planning Operational risk adaptation - A process of operationally adapting to such types of risks Operational risk pooling - Operational collaboration towards to such types of risks Operational risk mitigation - A process of operationally mitigating such types of risks Operational risk avoidance - Cancelling activities or outsourcing to not have to deal with it Financial risk transfer hedging / mitigation - Any type of risk insurance or financial action Page 235 PAGE 7: Climate risk events and supply chains (4/4) [Skip logic applies from Q.13.] Q.19. What in your view is the likelihood of your organizations supply chain getting more than marginally impacted by the following climate risk events over the coming three years? (Ranking matrix with horizontal 7-point likelihood rating scale, 378 single choice per row, requires answer) Row values: Heat wave Cold wave Blizzard / Snowstorm Drought Flooding Tsunami Extreme precipitation / Monsoon Hurricane / Cyclone / Typhoon Global temperature increase Global sea-level rise Column values: Exceptionally unlikely (<1%) Very unlikely (<10%) Unlikely (<33%) About as likely as not (33 to 66%) Likely (>66%) Very likely (>90%) Virtually certain (>99%) 378 Based on the likelihood standards as used in IPPC 2007a and 2007b. Page 236 Q.20. Which indicators would you monitor in order to predict the development of climate risk events possibly impacting your organizations supply chain? (Select up to 3 indicators) (2 Answer columns, multiple choice, min 0 - max 3) Short term temperature changes / forecasts Long term temperature changes Changes in precipitation level Changes in precipitation intensity Rising sea levels Changes in water/drought conditions Increased water scarcity Floodplain risk rating Changes in wind patterns Occurrences of extreme weather events Weather indexing / Extreme weather trending Climate insurance cost on capital assets Another indicator not mentioned (Please specify): (Text field) PAGE 8: A few questions about you [Skip logic applies from Q.7.] Q.21. Are you (1 Answer column, single choice, requires answer) Male Female Q.22. Are you working in one of the following fields? (2 Answer columns, single choice, requires answer) Supply chain, logistics operations / management Procurement, sourcing or contract management Organizational risk management / Risk management Quality assurance / Quality management Corporate Social Responsibility / Sustainability Financial management / Financial decision-making Page 237 Academic focus on any of the above fields Consultant / advisory function to any of the above fields Q.23. Two questions on seniority (Number field, requires answer) Please enter your number of years of experience in the sector in which you are currently working: Please enter your number of years of experience within the field of expertise in which you are currently working: Q.24. What would best describe your level of responsibility? (1 Answer column, single choice, requires answer) Director-level Senior manager below director level Middle manager Line manager Employee with limited to no managerial responsibility Q.25. In which country are you currently working? (Pull down list of countries of the world, single choice, requires answer) Q.26. Which country are you originally from? (Pull down list of countries of the world, single choice, requires answer) PAGE 9: Receiving the results Please fill out the following if you would want to receive the research findings. Name: (Name field, not required) Email Address: (Email field, not required)
Financial Rewards Alone Will Not Increase Job Performance and Satisfaction - A Study Into The Relationship Between Rewards, Job Satisfaction and Performance