As a potential supply chain disrupter, water scarcity is rapidly outpacing other concerns for companies around the globe.

- By Belinda Jones

Looking toward the future, environmental issues are of major concern for supply chain managers. Yet it’s not just climate change and carbon emissions than need to be addressed. Increasingly, water scarcity is surging ahead of other issues when considering potential environmental disruptions to global supply chains.

Understanding the key factors in water scarcity issues is a first step. By understanding these factors, logistics teams can use emerging best practices to develop an effective and appropriate response to the near certainty of future water scarcity.

Factors impacting water supplies for business use

Global consultancy Ernst & Young identified four main areas where water scarcity creates risks for supply chain disruption. These are: reputation, regulation, operations, and finance.

Reputation

Reputational risk comes from local competition for water resources as an input, and from the environmental impacts (real and perceived) of discharged water.

When businesses compete with individuals for water supplies, it can quickly become an “us vs. them” situation if not appropriately managed. For a current example, consider the Southwestern United States. Agricultural operations and energy producers are competing with a booming population, draining water supplies and igniting water rights battles that are disruptive and costly. Community perceptions about fair use and pollution by “big bad business” may not necessarily be grounded in reality, but that doesn’t reduce their ability to impact logistics and create headaches.

Regulation

Regulatory challenges definitely make water scarcity a key supply chain issue. Businesses are often easy targets for water restrictions by politicians, and, even when parent companies are unaffected, third-party suppliers located in areas with heavy regulation can dramatically increase exposure to water risks.

Non-compliance, either at the top level or within a contracted supplier, brings further disruption. Willful or not, violations disrupt supply chains and jeopardize future availability of water resources and other key parts, services, or raw materials.

Operations

Water scarcity is a very direct disruption risk in operations. Often, without adequate water inputs, there is no output. Where water treatments for clean discharge or appropriate dirty water storage systems fail, production can be completely shut down.

The businesses most impacted are energy producers, agribusinesses, high tech producers, mining operations, food processing plants, and cement operations. Many are located in the same at-risk river basin areas as large populations in emerging markets, adding another layer of operational risk.

Finance

The fourth element of supply chain risk related to water scarcity concerns finance. The profitability of many supply chains – and especially complex, multinational chains – depends on certain levels of costs and production outputs. If costs rise, through losses or reduced production levels, the supply chain is unprofitable and unsustainable.

Plus – especially in developed nations with highly litigious societies – there is no denying the disruptive potential of legal fines, compliance costs, and compensation for perceived (or real) water misuses. But these are just the obvious costs … the hidden costs are even more dramatic.

Even in firms that use little water, energy consumption is often based on power generated through water use. As those water costs rise, they are passed down the chain to end users who may not think of themselves as having exposure. Far better to be aware of these behind-the-scenes costs up front than be unpleasantly surprised later!

Developing an effective response

With these risks in play, how can a business respond in a way that is effective and incorporates emerging best practices from around the world? After all, according to research by the Carbon Disclosure Project, only half of surveyed firms were actively considering water scarcity as a risk. Among those who did, most only had knowledge of their own direct use, with little reliable information about their supply chain and vendor needs.

Thus, the first step is to start with a baseline awareness of water consumption throughout the supply chain – both in house and with third party vendors. Known as a firm’s “Water Footprint,” this metric should assess needed inputs, expected water discharges, and percentage of waste/reuse.

There are multiple tools available for measuring water footprints. A key reference is the International Organization for Standardization (ISO) standard on water footprints, which can guide your firm toward the best metrics to use in more than 20 major nations. The ISO 14046 specifies principles, requirements and guidelines related to the water footprint assessment of products, processes and organizations, based on life-cycle assessment.

Other leading tools include the Global Water Tool, from the World Bank Council for Sustainable Development (WBCSD), and the Aqua Gauge from the Ceres Roadmap for Sustainability. These tools can bring your firm a true competitive advantage, as, while many firms know their own consumption numbers, few have a water footprint established for the full length of their supply chain, according to Sebastien Humbert, co-founder of Quantis (an environmental consultant) and key architect of the ISO 14046.

With your footprint established, the next step is to pinpoint the areas of greatest vulnerability along the full length and breadth of the supply chain. This will be particularly important where raw resources are coming from emerging markets with water challenges. You can minimize disruptions by making smart investments in efficient use tools or alternative sourcing now.

As a forward-looking move, the next step is to increase the potential for re-use or recycling of water inputs. In areas of sharp water shortages, this is smart business and smart PR, while, even in areas where water is abundant, moving in this direction can cut costs and provide an enhanced environmental awareness reputation.

Finally, include a discussion and assessment of water scarcity disruptions at the beginning of all future supply chain decisions. By incorporating water scarcity in initial planning, the sustainability of the supply chain can be improved while minimizing the impact of increasing global water shortages. Plus, since many firms are aware of the issue but few have a holistic water scarcity strategy for their supply chain in place, this could be an excellent chance to position your firm as a market leader in smart water solutions.