From grape to glass: The environmental risks impacting business and budgets
Andrea Murad finds out how climate change and weather events in California can be especially damaging for the food and drink industry’s bottom line, and what lessons in supply chain management can be observed for all sectors.
For vineyards and wineries, for example, environmental risk starts at the vine, and successful production heavily relies on uninterrupted agriculture, manufacturing and transportation networks.
All stages of production can be affected by drought, hurricanes, and wildfires, of which North America and the Caribbean have borne the brunt in recent months.
The October 2017 fires in wine country have shown how quickly tragic events can overtake a business. While there is little that can be done to cover for loss of an entire winery, there are many other areas that can be planned for, including back-up power supplies and third-party processing. Even where you have plans in place, it will be important to review these afterwards to identify changes and improvements.
Risk management starts at the core and works its way out... Then you extend out to your suppliers.
“If you’re not thinking of what’s critical to your business from a business continuity standpoint, you’ve got a big hole in your plan and a lot of risk,” said Ian Swanson CA, CFO of Delicato Family Vineyards, based in California.
“On a day when everything’s going great, it’s not a problem, but those supply lines can be disrupted for a day or weeks or months - you’ve got to have a good understanding of that and develop a duality of supply.
“Risk management starts at the core and works its way out - water, crops, manufacturing. Then you extend out to your suppliers and everything you’re dependent upon.”
Agricultural risks and unexpected costs
“You have to prebuild to manage that risk before it happens,” said Ian, and sometimes understanding business and supply chain risks is an art rather than science. The potential impact of disruption and when it occurs can be unpredictable, but there are steps that can be taken to mitigate damage.
Some of the biggest risks affecting agriculture are climate change, soil degradation, and declining pollinators and pesticides at the production level, said Tensie Whelan, Clinical Professor of Business and Society and Director of the Center for Sustainable Business at New York University’s Stern School of Business.
Crop production can be damaged by a lack of pollinators, like birds, bees and bats - all affected by climate change and natural disasters - and farms require biodiversity maintenance to create barriers against pests and disease. Most wine grown in California is sold within six to 24 months of the crop, and any issues are generally managed by having more than one source of supply both within and outside of California, as well as internationally.
Water issues also abound in an agriculture state like California, which has a history of droughts. If the growing season for a product is delayed because of the weather, those who purchased contracts in advance would be covered, but those who played the spot market would have to scramble, said Carrie Ericson, Vice President at A.T. Kearney. If someone has to change their supply chain mid-production, alternative arrangements are often more expensive.
And figuring out what crops to grow requires farmers and businesses to evaluate their current and future water supplies.
“You’ll hear people say that California is exporting water - one of the major crops out of California is nuts and most of that’s exported,” said Ian. Some companies have even replaced their grape crops with almonds, which provide a stronger economic return, but require two to three times as much water as grapes to grow.
Finding clean water sources is an ongoing issue, and depleted aquifers which can’t be replenished will cause the ground to drop as it settles to fill the void. Some areas of California have experienced harmful concentrated levels of nitrates in water due to evaporation and droughts, which are toxic to fish. When purifying water becomes necessary, then every cost along the supply chain increases.
Increased costs from by-products
A by-product of the wine fermentation process is carbon dioxide, which creates a carbon footprint. The wine industry has to comply with the same environmental rules as heavy industries and require proper permits to operate tanks.
To mitigate the risk of increased environmental costs, companies can decide an internal price for carbon and water, suggested Tensie. While water is currently free, companies can pay into a technology investment fund and become better positioned for the future. Industry by-products are common across all sectors, and as environmental regulations tighten it’s increasingly useful to look at the entire supply chain in a holistic manner to anticipate extra costs and add-ons.
Keeping the routes open for distribution
Trucks need to meet state regulations for air quality, and out-of-state trucks that transport produce across California state lines need to comply with emission standards, which adds to freight costs. Rail is only an option if the price of diesel increases and a company produces enough volume for shipment.
For products transported by sea and arriving by port, an extreme weather event can close ports for weeks while products sit in their containers, potentially rotting. The onus is on companies to again look towards securing multiple supply chains and routes to avoid disruption to transportation across roads, rail and ports.
Next time you’re going to the store and notice a clear shelf, it could mean the supply chain management needs further assessment.
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.