How manufacturers manage their natural resources in the coming decade will be the pivot point which determines whether or not they keep their factories humming.
Why? According to Andrew Winston, author of The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, and More Open World, global pressures will place a very heavy burden on the supply chain.
The macroeconomic factors driving this “hotter, scarcer and more open world” are a growing global middle class occurring at the same time the global weather conditions are becoming more extreme. Complicating these factors is the “technology-driven demands for more transparency” explains Winston.
Climate change, however, is the predominant factor forcing manufacturer’s hand. The most recent example is the massive supply chain disruption the hard drive and auto sectors experienced as a result of the floods in Thailand in 2011.
And that won’t be the last time climate conditions adversely affect manufacturing companies. Climate risk will extract a potential $44 trillion impact by 2025 since nearly one third of the global economic output will come from companies facing “high” to “extreme” risks due to climate change, Winston points out.
Looking at the U.S-based cost of climate change, 2012 was the second costliest year, according to the insurance industry, which estimated $139 billion in damages.
How should business respond?
The first step is to acknowledge that there is an issue. CEOs are there already. A PwC study showed that over half of executives surveyed said that energy and resource risks have “overtaken consumer spending and behavior as one of the top three threats to growth prospects."
“At the most basic level, the planet is our balance sheet… our largest asset,” explains Winston.
As prices for commodities increase and global demand for resources expands, Winston is concerned that businesses will see this merely as a normal business cycle. “When prices come down—and they will, because they’re volatile—they’ll come down to a generally higher spot than the last time they decreased,” he says. “And when they go up again, they’ll go even higher than the last peak. This change in resource price patterns is a true paradigm shift and it’s a driver of the Big Pivot that most companies are not ready for.”
Innovation will be the key to survival, Winston believes. “We need heretical innovation in resource efficiency (particularly energy and water) and in material science.”
Many companies are already addressing these issues. One method, used by Nestle, is to decouple growth from input. The challenge is to continue growth without increasing the use of energy, water and other materials. Nestle, for example has increased production by 53% over the past decade but cut major inputs such as waste (almost 50%), on-site energy use ( 6%) and water ( 29%).
Unilever’s CEO Paul Polman is following suit by seeking to halve its environmental footprint “of making and using our products” while doubling revenue.
Ford’s approach to this issue is based on what Winston calls “science-based goals”. As early as 2004 Ford’s scientists were focusing on what climate change would mean to the company. The company currently has a “technology migration plan” to keeps its product development process in line with its climate stabilization path. The company wants to double its fuel efficiency by 2025. In addition to create better combustible engines with improved aerodynamics, Ford is looking at low-carbon alternative fuels with oil company partners.
Throughout his book Winston points to examples of companies who are addressing the issue by changing philosophies such as looking at ROI differently and moving from a short term perspective to a longer term one. He offers 10 radical strategies to deal with these “mega challenges and build a prosperous world. “