Increasing global competition for resources, a complex and evolving regulatory environment and rapidly escalating climate change are coalescing to give rise to a global water crisis that the World Economic Forum has ranked as the world’s top global risk.
According to a CDP survey of more than 800 of the world’s largest companies across all industries, 68 percent of respondents said that water-related risks could “generate a substantive change” to their business, operations, or revenue, with the greatest risks noted in the utility, energy, and consumer staples industries. Furthermore, and perhaps more tellingly, 22 percent said that water-related issues could limit the growth of their business.
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For U.S manufacturers – particularly those in the food sector, which is responsible for 70 percent of the world’s freshwater use – these global threats could materialize into tangible and potentially costly challenges, including supply chain disruptions and expensive production inputs to maintain compliance. Furthermore, in California, the nation’s breadbasket, the ongoing drought crisis cost the economy $4 billion last year, mostly due to lost crops, sinking land above overused groundwater reserves and lost revenue for businesses, reports the New York Times. This staggering number serves as a reminder to manufacturers to strengthen and secure their supply chains against this escalating risk.
In the face of these challenges, what steps can U.S. manufacturers take to put their businesses on the right track to weather today’s water shortages, and thrive into the future?
1. Conduct Broad Risk Assessment and Increase Board Oversight
Though most major companies conduct environmental oversight at a broader level, as shortages and extreme weather become more pronounced globally, it becomes increasingly important to address water risks separately and specifically. The process begins at the board level, with a thorough audit of water-related risks throughout the manufacturing process, including analysis of supply chain, regulatory and reputation risks to which the company may be exposed.
According to this year’s BDO Manufacturing Risk Factor Report, 100 percent of manufacturers cited concerns around supply chains and vendors, up from 83 percent just two years earlier. Additionally, 96 percent of companies mentioned environmental regulations, up from 87 percent last year.
As drought conditions persist in California and across the nation, manufacturers should consider prioritizing these water risk assessments, particularly given that the potential consequences of slow action or inaction can be damaging and costly. A thorough risk snapshot can help manufacturers begin to address short- and long-term threats, and create and implement manageable changes and solutions within both their supply chains and their production processes.
2. Mitigate Risk and Improve Corporate Social Responsibility by Addressing Watershed Concerns
Conservation and shortage issues emerge along the supply chain long before water sources reach their final destinations and become available for use in manufacturing processes or for machine cooling. To address these challenges, many major corporations have invested in water management to curb factory water use and minimize wastewater. Nestle, for example, has successfully transformed one of its dairy plants in Mexico into a “zero water” facility, and is working to implement similar strategies in California water bottling plants and factories that manufacture food and pet care products.
While factory-level measures are important and, in the aggregate, hugely impactful, moving up the supply chain to address degradation issues at the watershed level can help stimulate water efficiency from the source, improving sustainability along the entire water supply chain. Coca-Cola has been a leader among food and beverage producers in its water replenishment and watershed management efforts. For example, the company has invested heavily in a watershed project in Indian Valley, an area in California’s Sierra Nevada Mountains that is home to streams which eventually feed the San Francisco Bay area and one of Coca-Cola’s bottling plants.
Corporate social responsibility initiatives are a valuable contributor to a company’s reputation and image, as well as to its bottom line. Because a healthy water supply is a universally necessary resource and a crucial building block for healthy communities, investing in watershed and water conservation efforts can be a mutually beneficial way for manufacturers to sustain not only their own supply chains, but also the communities in which they and their customers work, live and play.
3. Take Advantage of Rebates and Incentives for Sustainable Factory Practices
Reducing water consumption in factories, particularly food manufacturing plants, begins by investing in new and/or redesigned manufacturing processes in order to do more with less. Development and adaption of new technology in manufacturing processes is critical to alleviating the effects of water shortages and moving toward more sustainable models of water use in the industry.
Promising technology and innovation exists to revolutionize water treatment and usage as well as water-intensive manufacturing practices, and further new developments are possible with continued research and development. However, companies need incentive to make the extensive capital investments necessary to develop these technologies and practices and bring them to fruition.
For example, the Metropolitan Water District of Southern California has begun offering rebates and incentive programs to industrial producers that implement solutions, based on the amount of water saved. Continued and expanded credits and incentives at the local, state and national level could benefit manufacturers in the state and nationwide and stimulate development and innovation by manufacturers that depend on inputs from California’s breadbasket.
What could be next for manufacturers?
Just as food manufacturers increasingly face unforeseen costs and potential business complications brought on by a fourth consecutive year of drought conditions on the West Coast and nationwide, so too do other manufacturing subsectors, including apparel manufacturers and producers of fabricated metal products. Coupled with other industry shifts such as new workforce demographics and technological advancement, they make the time ripe for innovation and restructuring.
Specifically, manufacturers can invest in the future by putting into practice holistic, forward-looking approaches to sustainability, from both a sourcing and a production perspective. The key to weathering water shortages and other severe conditions is to look for opportunities outside factory walls to strengthen supply chains and water management practices, and ultimately achieve business growth.
About the author
Rick Schreiber is the national leader of BDO’s Manufacturing & Distribution Practice, with more than 23 years of accounting experience. He services clients in a range of subsectors, including fabricated metals, food processing, machinery, plastics, rubber and transportation equipment.