Water came to the fore of supply chain risk management for companies in industries such as consumer electronics, automobiles and parts after floods in Thailand disrupted supplies in 2011. Businesses also face growing financial risks from water stress, as changes in rainfall patterns, more frequent and severe droughts and growing competition for resources threaten to disrupt supply chains and increase manufacturing costs.
Trucost's analysis of companies in the Nikkei 225 Index found that supply chains account for more than three-quarters of a total of 79 billion cubic meters of water used in manufacturing processes. This is more than the total amount of water used by industry and agriculture in Japan, because most of the water is consumed during the production of goods imported from other countries in Asia Pacific.
For two-thirds of companies in the Index, more water is used in supply chains than in operations. Suppliers in the first tier of their supply chains, as well as those further upstream, are responsible for 60 billion cubic meters of water use. Much of this water is sourced from locations such as China and Singapore, which face growing demand for declining water resources.
Of the sectors with the highest levels of water use, the share consumed by suppliers is greatest for food & beverage, personal & household goods and automobiles & parts companies. They could be affected by pressure on water resources through water pricing or scarcity driving up commodities costs.
Companies are at the starting blocks of understanding financial risks and opportunities from water-related challenges in operations and supply chains. Companies that assess water risks will be well placed to strengthen water management strategies, secure supplies and stabilise input costs.
KPMG Director Kazuhiko Saito, co-author of the study, said: "Companies headquartered in countries where water is relatively plentiful, including Japan, have tended not to pay much attention to the impact of water scarcity on business operations. An increase in the rate of relocation and outsourcing of production abroad, particularly into water-stressed regions, however, could put companies in water-intensive sectors at greater risk. Companies are increasingly required to identify and respond to material water risks in supply chains."
Trucost Research Editor Liesel van Ast, co-author of the study, said: "Companies will increasingly need to monitor data on the water dependence of their suppliers in order to understand risks to water resources that their operations and supply chains depend on. By understanding which suppliers are most exposed to water scarcity, companies can act to protect vulnerable water sources and reduce exposure to business disruption, operating restrictions and higher water tariffs. Companies can identify water hot spots and benchmark suppliers on water risk to prioritise areas for supply chain water management."
