Supply Chain

Worrying about Water

As water becomes scarcer and more expensive, companies should work with stakeholders to keep their water risks down.
Caroline McDonaldOctober 8, 2012

As one of the hottest summers on record wound down in August, more than 60% of the contiguous United States continued to experience drought conditions, particularly in the Midwest. No wonder experts are advising companies to focus more than ever on intelligent water usage, work with key stakeholders to keep costs down, and avoid potential compliance and reputational problems.

The price of water has jumped an average of 18% since 2010 and 7% over last year in 30 major cities, according to Circle of Blue, a water research and information organization. Rates have risen highest this year in Chicago, by almost 25%. Water prices are rising faster than the price of most other utility services, including gas, electricity, and telephone, says the Institute of Public Utilities at Michigan State University.

For companies, the jump in water prices “can affect financial performance, growth strategies, emerging-market strategy, and supply-chain management,” says William Sarni, practice leader for enterprise water strategy at Deloitte Consulting. “CFOs need to pay attention.” Continuity is another issue: companies need to ensure they have enough water to run the business over an extended period of time, he says.

Companies that are good stewards of water as a resource have seen their brand value enhanced, Sarni says, and the converse also is true. “Reputational risk and brand value are two sides of the same coin, so if you don’t pay attention to [water stewardship], you risk that it will impact your brand and thus your ability to operate,” he warns. Industries that depend on water to produce their product, such as beverage companies, have paid close attention to this issue for some time.

Water Footprints
Companies hoping to safeguard profits from water shortages must first determine their “water footprint,” that is, how much water they are using. “Water footprinting is not just direct usage, or how much is being used within a manufacturing or bottling facility,” explains Sarni, “but also what’s being used throughout its supply chain.” That is as true for apparel companies that rely on the agricultural sector as it is for food and beverage companies. Companies also must pay attention to where they are using water, he notes, emphasizing that the availability of water is very much a local issue.

Some businesses begin by researching how much water they are using within a particular watershed (a land area where all water that lies under it or drains off of it goes to the same place). “Every watershed is different,” says Sarni. Only some of them are in areas experiencing water stress or scarcity. Companies should take heed of not only where they have operations but also where members of their supply chain do. While a beverage company, for example, may have a bottling plant in an area that is not experiencing water stress, agricultural and other suppliers may be seeing the opposite.

A number of companies are becoming more efficient in how they use water, Sarni says. “They are reusing and recycling as much as they can and also engaging with stakeholders within a watershed to collectively manage that resource so there is enough water for everyone to operate,” he says.

For example, Kimberly-Clark, the health and hygiene consumer-goods multinational, says it returns 94% of the 34 billion gallons of water it uses annually, and is involved in water replenishment projects in such countries as India, Israel, and Spain. The company aims to reduce its total manufacturing water use by 25% by 2015. Food and beverage giant PepsiCo received the 2012 Stockholm Industry Water Award earlier this year, in part for improving its water efficiency by more than 20% since 2006, four years ahead of its stated goal.

Ripple Effects
Water is a critical resource in the energy sectors, where it’s needed for cooling nuclear, coal, and gas power plants and for shale gas hydraulic fracturing, for example, and in manufacturing, such as in the production of semiconductors. But energy companies may not be seeing the effects of water shortages just yet. Andy Bishop, CFO of Hallador Energy, a Colorado-based coal and petroleum mining concern, says water shortages have not affected the company in a material way. James Pardo, a partner at McDermott Will & Emery who often represents petroleum companies, says shortages have not had a significant effect on pricing, productivity, or profits in the oil and gas industry, but they could curtail exploration if they continue to grow.

While there has been much focus on water issues because of the drought, Sarni points out that there is a distinction between water scarcity and drought. “You can have water scarcity without having a drought, because some of the factors that come into play are increasing population, increasing economic activity, the rise of the middle class globally, and increased urbanization. All place demands on a finite resource,” he says.

As water becomes scarcer, there will be regulatory changes designed to manage the resource, says Sarni. “Companies need to think about what regulations are in place now and what they could look like in 5 to 10 years, as part of a routine risk-management strategy,” he says.