Are water shortages threatening to leave your supply chain high and dry?

Published on Tue, 06/23/2015 - 00:20

When it comes to the essentials of life, fresh water is about as basic as it gets. Since the beginning of time, people have sought water out, struggled to tame it, bought and sold it, and even fought and died for it. But with rising global demand and a changing climate, the sources of this precious commodity are quickly drying up, and according to the World Economic Forum, water scarcity has become a global systemic risk of major concern.

Here in the U.S., you don’t have to look any farther than the ongoing drought in California to get that message loud and clear – and it’s a crisis that’s already having serious financial consequences. A study by the University of California, Davis, estimated the drought in California cost the state about $2.2 billion in 2014.

Dwindling water supplies are affecting food prices too. In the 2014 year-end report on the Consumer Price Index, the Bureau of Labor Statistics (BLS) noted that the index price for food increased 3.4 percent in 2014, up a 1.1 percent increase in 2013.

Water shortages are also a growing threat to businesses, especially those in manufacturing.

Consider this…

By some estimates, it takes 80,000 gallons of water to produce one automobile; 700 gallons for one cotton shirt; and 24 gallons to produce one pound of plastic. That’s an incredible amount of water. Just try to do the math for all of the goods manufactured worldwide!

The fact is, water shortages can have a huge impact on your business operations, production numbers, energy costs, competition, and cost of goods and services. Even concerned investors are putting pressure on companies and asking what measures they’re taking to avoid a serious water crisis.

That’s why discussions about water supply issues are now commonplace in corporate boardrooms across the country. In a survey by CDP, an organization that works with investors and companies to increase environmental risk awareness, more than 830 of the world’s largest companies were questioned about how a water shortage would affect their operations and supply chain – and more importantly, what they’re doing about the risk.

“Substantive change”

Sixty-eight percent of those companies said water-related risks could cause a “substantive change” in their business, operations, or revenue. Almost a quarter (22 percent) said water-related issues could limit the growth of their business.

Reducing the risk

Obviously, you can’t control the water supply for every link in your supply chain. But your risk management strategies need to take today’s water challenges into consideration.

Beyond that, your own water conservation efforts are your best defense, and corporate water stewardship is rapidly growing as businesses attempt to reduce their water consumption. To help with those efforts, the UN established the CEO Water Mandate in July 2007, a public-private initiative designed to assist companies in the development, implementation, and disclosure of water sustainability policies and practices. Also, the Alliance for Water Stewardship has created a standard that helps businesses make changes to preserve water, and the conservation group WWF outlines steps companies can take, beginning with water awareness.

Showing leadership

With the public and media becoming increasingly aware that many companies are contributing to unsustainable water use, businesses today also face a reputational risk related to water usage. Being a conscientious steward of the water supply demonstrates leadership and environmental awareness. That’s not just good risk management – it’s good brand management.

The situation in California should serve as a stark reminder that natural disruptions are a constant risk in your supply chain. Make sure your risk management strategies are ready for the challenge.

Need an assessment of your risks? Talk to the business insurance experts at Heffernan Insurance Brokers.