Industrial production in the Indian State of Maharashtra, where Mumbai is located, got a major hit in 2016 when water supplies were short. In the same year, about half of the manufacturing companies in the Bolivian city of Cochabamba were affected by water shortages, leading to a decrease of 15% in industrial output. Last year, India’s apparel industry was heavily affected by water shortages, and this year even Cadbury and Jaguar in the UK had to temporarily close down their factories due to freshwater supply problems.
Water shortages are commonly seen to affect agricultural production and household water supply in underdeveloped parts of this world. Due to the globalization of sourcing, also manufacturing companies are increasingly faced with problems due to water shortages somewhere upstream in their supply chain. While supply disruptions due to natural disasters or terrorism have received substantial attention and more and more companies have been mapping their risk, few companies have realized that they may have a little time-bomb ticking at one of their (maybe far-away) upstream suppliers. A new research article in the Journal of Cleaner Production (“Water Risk Assessment in Supply Chains” – free download until 9 December 2018 at this link; after that, please contact us to request a copy) by my co-authors Torben Schaefer, Maximiliano Udenio, Shannon Quinn and myself sheds light on this risk and provides a methodology for companies to take action in mapping their supply chain’s water risk.
What is water stress?
The availability of clean water is one of the most important sustainability challenges we are facing today. It is a challenge that is expected to increase in the future; and yet, its visibility by supply chain managers community is limited. An area is said to be experiencing water stress when the amount of clean water available is smaller than the amount of clean water required. Clean water is a precious resource. Civilian populations need clean water to live, agriculture and farming need water to produce our food, and virtually every industrial process needs clean water to function. However, even though clean water is a universal requirement, in the face of its unavailability the response is clear: the priority for securing access to clean water will always be for civilian populations and food production. There are numerous examples in recent years where governments divert limited water resources such that water is allocated to civilians. In such cases, industries must continue without water, or shut down. In a globalized world, production in any particular location often depends on raw materials or components sourced from across the globe. Supply chains literally span the earth.
What should you do as a supply chain director?
For firms interested in reducing their exposure to water risk, this means that they must monitor the situation of their entire supply chains. If your suppliers, the suppliers of your suppliers, or the suppliers of the suppliers of your suppliers are located in an area that runs the risk of access to clean water, you run the risk of supply or production disruptions due to access problems with clean water.
In our new article we term this risk, relevant for firms across industries and across the world, water risk.
It is not easy for a company to understand your exposure to water risk: data is difficult to collect, and even when data is available, it is difficult to compare the different dimensions of the problem to come up with a metric that summarizes their risk exposure. Therefore, we developed a new index intended for companies to measure and understand the water-risk of an entire supply chain. Our risk index is composed of 6 base indicators that each measure a different dimension of either “physical” water risks (baseline water stress, seasonal variability, and drought severity) or “amplifying” water risks (external dependency ratio, governance and regulation, and infrastructure).
Given a geographical location, our risk index quantifies the water risk using a single number, by taking into account the aforementioned components, and experts’ assessments to weigh each of these components into the single water risk indicator. Looking at the problem from a strategic perspective, our water-risk index allows firms to assess geographical areas in terms of water-risk. This allows you to, for example, compare geographical locations of potential new suppliers, or forecast the water risk of your current supplier base for the next decades.
Moreover, our risk index allows for tactical analysis of the water risk at the level of individual processes, products, or manufacturing locations. In this way, you can identify the products or processes with the highest water footprint and consequently analyze its supply chain to detect water risks.
Application at Procter & Gamble
We worked together with Procter & Gamble and applied our methodology with them. From a tactical perspective, we were able to immediately identify some suppliers of a critical raw material that are located in areas with high water risk. Moreover, the water risk in these areas is expected to increase in the coming years. From a strategic perspective, we mapped the water risk of their more than 1000 suppliers to identify the suppliers and areas with highest risk today and in the future.
Procter & Gamble have not only realized the potential of water risk assessment for the reliability of their supply chains, but also for the communities where their supply chain’s plants are located. Consequently, in its recent new sustainability strategy, specific targets have been included for reducing the company’s water footprint, and with that, likely also the company’s water risk.
Including water risk in your supply chain risk analysis is critical. The great news is that acting on this will not only reduce the vulnerability of your supply chain, but also make many communities that face water shortages a better place to live.