Climate Adaptation Unlocking Value Chains with the Power of Technology 2025

Over time, manufacturing has become extremely global in nature, relying on intricate supply chains that span several continents to integrate raw material supplies, production, assembly and distribution, making them extremely vulnerable to disruptions. As the aftermath of the Covid-19 pandemic demonstrated, manufacturing systems nowadays are prone to ripple effects where small, seemingly insignificant events in one part of a value chain can lead to large, unpredictable consequences across all other nodes in the chain. When a butterfly flaps her wings, a breeze goes around the world Climate change exposes global manufacturing to even more risk. Water scarcity, in particular, is a growing concern for manufacturing. For example, frequent droughts at the Panama Canal, which handles up to 6% of global trade, have reduced traffic from 40 to 24 vessels per day.48 This has delayed the movement of raw materials and finished goods in sectors such as electronics, automotive and consumer goods, driving up costs across these value chains. Taiwan, producing over 60% of the world’s semiconductors, is dealing with prolonged droughts that have forced chip production cuts and worsened the global semiconductor shortage, affecting several other sectors – a scenario that is likely to persist because of climate risks.49 Compounding the climate chaos is the rising frequency of extreme weather events. In 2024, severe flooding at a key aluminium supplier forced Porsche to slash its revenue forecast from €40-42 billion to €39-40 billion and its anticipated profit margins by two percentage points.50 Extreme weather events can disrupt supply chains and damage corporate bottom lines if climate risks are not addressed.51The societal impacts of climate-induced problems are far-reaching. Shortages of critical products such as electronics, pharmaceuticals and food drive up prices, disproportionately affecting vulnerable communities, especially in low-income countries. By 2025, it is estimated that unmanaged climate- related supply chain disruptions could cause losses of $3.75 trillion to $24.7 trillion annually, depending on carbon emission levels.52 In the 3.0°C warming scenario, physical climate risks could threaten 4%- 8% of manufacturing companies’ annual profits (EBITDA),53 with impacts rippling across interconnected economies worldwide. Flexible supply chains make resilient industries Fortunately, some manufacturers are using adaptation strategies to reduce climate-related risks. Dual sourcing and higher inventory levels, which allowed them to offset supply chain disruptions during the COVID-19 pandemic, are now being repurposed to manage extreme weather events. As a result, companies that have diversified their supplier bases are experiencing fewer disruptions compared to those relying on single suppliers.54 Building buffers is a key adaptation strategy. Recognizing their vulnerability to climate impacts, companies that adhere to just-in-time (JIT) philosophies have adopted a novel hybrid approach. Many have shifted to a just-in-case (JIC) methodology, creating buffer stocks and developing multiple sources of supply. This allows companies to benefit from JIT’s efficiency while improving their ability to adapt when disruptions occur.55 Many companies using adaptation strategies generate higher economic returns, incur lower costs and benefit all stakeholders in the value chain. Perceived benefit-to-cost ratios ranging from 2:1 to 20:1 have been reported.561.3 Manufacturing systems Frequent droughts at the Panama Canal, which handles up to 6% of global trade, have reduced traffic from 40 to 24 vessels per day. Climate Adaptation: Unlocking Value Chains with the Power of Technology 23