Climate change is increasing the frequency and intensity of extreme weather events around the world. But, while floods in Southeast Asia and wildfires in Europe and North America may seem irrelevant to small and medium sized businesses (SMEs) in the UK, these extreme weather events can create supply chain chaos.

Disruption can occur in a number of ways. Transport and logistics can be seriously affected, with planes grounded and ports closed by weather events such as hurricanes, typhoons and floods. 

Take the Panama Canal as an example. It handles around 6% of global maritime commerce and is heavily reliant on freshwater for its operations. When the region was affected by a drought in 2023, the canal authority imposed ¹ weight restrictions  on the larger ships using the waterway .

For a small business, the effects can be even more devastating. Unlike a larger company, it might not have sufficient stock or deals with multiple suppliers to mitigate the effects of supply chain disruption. They can be often faced by the inability to get a part, or a spike in the cost of raw materials, and this could even mean the business goes under.

Delayed in transit

National transport links can also struggle with weather extremes. Heatwaves can cause roads to melt and lead to rail tracks buckling. Strongs wind and rain can also make transporting goods hazardous, with high-sided vehicles particularly vulnerable to crosswinds.  

Even without an extreme weather event, transport can be affected by climate change. As the earth has warmed and ice sheets melted, sea levels have risen. According to the Met Office ² the global mean sea level rose by about 20cm between 1901 and 2018, with the rate accelerating year-on-year. This will have ramifications for ports but also any infrastructure at sea-level. 

Production line stoppage

Climate change can also affect production around the world, potentially causing the supply of parts to reduce or stop altogether. This could be due to an extreme weather event, such as a flood or hurricane, making a factory difficult to access, or disruption to energy supplies restricting production. Heatwaves can also affect production lines, especially where employees may be affected by heatstroke.

As an example, severe flooding in Slovenia in 2023 had serious implications ³ for the motor industry. Every car produced in Europe has at least one part made in Slovenia and with production lines underwater, supply chains dried up. 

The availability, cost and quality of raw materials can also be affected. Crops fail due to extreme weather and pests and diseases thrive, affecting yield and quality.  For a food producer, this can mean higher prices and scarcity of ingredients. 

Small business squeeze

Disruption to the supply chain can have serious implications for any business. Without a key component, a business’s own production line can grind to a halt. This can lead to increased costs, reductions in profits and customer satisfaction and even the risk of contractual disputes. 

As temperatures rise and extreme weather events become the norm, it’s vital that SMEs build more resilience into their supply chains. This will help to reduce disruption and keep the business running. 

First and foremost, business owners must understand their supply chain. As well as knowing where suppliers are – and where necessary, their suppliers too – it’s  important to consider how their operations might be affected as a result of climate change. 

Where potential issues are identified there are several options available to create more resilience in the supply chain. These include:

Diversifying suppliers – identifying additional suppliers can create more flexibility in the supply chain. Ideally these should be in different regions or countries to avoid them all being affected by an extreme weather event.   

Building stock – holding sufficient components to keep production lines rolling or to meet customer demand may be worth considering, although this strategy does come with additional cost and storage implications. 

Onshoring supply – a UK supplier can still be affected by extreme weather events but shortening the distance items travel will remove the climate change risks associated with long distance transportation. 

At Allianz, we are committed to supporting SMEs in navigating the challenges posed by climate change and ensuring supply chain resilience. We have created a list of useful tools and online resources to help support you and your business:

Free supply chain risk toolkit: Access our online assessment tool that allows you to create customised dashboards to identify high-risk suppliers and provide risk ratings.

Suppliers extension coverage: Protection for UK-based suppliers with coverage up to £100,000 or 10% of your gross profit sum insured (whichever is less).

Additional business interruption protection: Coverage for interruptions caused by damage to premises of suppliers, customers, or exhibition sites within Great Britain, Northern Ireland, the Isle of Man or the Channel Islands.

Customer premises coverage: Protection for business interruption due to damage at customer premises (up to 10% of Gross Profit Sum Insured or £100,000, whichever is less).

Exhibition site coverage: Coverage for exhibition sites where you display goods or services (up to 10% of Sum Insured or £50,000, whichever is less).

Learn more about how we can help 

1.  Panama Canal lowers maximum depth limit on ships due to drought | Reuters

2. Past and future sea level rise - Met Office

3. Slovenia Impact on Global Automotive Supply Chain - Everstream Analytics

4.  Climate change: What will be grown in the UK in 50 years? - Farmers Guide