April 29, 2013

Extreme weather can wreak havoc on cities and their economies. Damage from hurricanes Katrina and Sandy is estimated at more than $150 billion and over $60 billion, respectively. Weather-based power failures and disruptions to transportation systems can delay commuters, stall deliveries, and choke supply chains. And even where extreme conditions are common, economic life suffers. Regions with hot, wet climates are less productive on average.

Professor Marcelo Olivares wanted definitive evidence to show whether — and how much — extreme weather affects productivity. Olivares’ experience studying inventories and production in US automobile assembly plants provided that opportunity. With Gérard P. Cachon and Santiago Gallino of Wharton, Olivares matched weather station data with detailed weekly production data from US auto plants.

Some aspects of production are seasonal — carmakers produce and sell more convertibles in warmer, sunnier months, for example — so the researchers had to control for expected production drop-offs as well as those resulting from extreme weather. The characteristics of the plants are also important — newer plants tend to be located in southern US states, which have different weather patterns than Detroit. By focusing on the variation in production of each plant over time, the study explains how much of the production changes can be explained by extreme weather and not just normal local conditions. Their data included weekly work schedules, which are planned with seasonal conditions in mind but don’t account for possible severe weather. By comparing the plans with actual work and weather station data, they could estimate how drastically weather affected production.

Next, they assessed economic impact. “By measuring the effect of a particular weather event together with the frequency of these events, we were able to calculate average production loss for a typical plant in the United States,” Olivares says. They learned that productivity declines by about 1.5 percent on average per plant due to each extreme weather event, with individual plant productivity declines ranging from as little as .05 percent to as much as 3 percent.

“Those numbers don’t seem very big,” Olivares acknowledges. “But in any given week the effect can be very pronounced. For example, extremely hot weather — defined as seven consecutive days of temperatures above 90 degrees Fahrenheit — can cause production declines of up to nine percent for that week,” he says. “That adds a lot of volatility into that plant’s production, which is costly to the manufacturer, who needs to be able to predict its production. So it not only reduces average production but also introduces variation, making it harder to control.”

The researchers also looked at extreme levels of wind (defined as 40 mph or more), precipitation (three or more consecutive days of snow or rain), and cold (below 15 degrees Fahrenheit). They found that extreme heat tends to have a greater impact than extreme cold, but snowstorms and intense heat reduce production about equally.

The researchers’ data does not reveal the specific ways in which bad weather can lower production. Do workers have a hard time reaching the plant? Is the supply chain disrupted? Both? To fill that gap, they talked to plant managers, who monitor weather constantly. “So they plan their inbound deliveries from suppliers based on weather forecasts,” Olivares says. “If a big snowstorm is forecast that will likely slow transportation, they try to get delivery to inventory before the snow comes. They also acknowledged that they see more employee absenteeism during extreme weather events.”

The researchers also found that plants struggle to recover after weather-related disruptions. “Production lapses one week could affect production the following week — if weather delays inventory, for example, the schedule gets knocked back,” Olivares says. “Plants may not catch up until two or three weeks later.”

The effects extend beyond the plant itself. In a follow-up study, the researchers looked at how extreme weather altered auto availability at dealerships. When a plant’s production is disrupted, deliveries to dealerships are also likely to be delayed. With less variety available to customers, sales drop.

Extreme weather even affects indoor production centers with temperature controls that allow operations under unusual conditions — an outcome the researchers didn’t expect. Office environments aren’t immune, either, Olivares says, noting research showing that weather can affect mood, which can diminish productivity.

As climate change threatens to make extreme weather more common, businesses may find it prudent to plan accordingly. The popular lean production model pioneered by Toyota, for example, may need changes. “Toyota’s goal was to eliminate all the waste in the process to increase overall productivity,” Olivares says. “That means operating with low levels of inventory, which means weather disruptions are likely to have a higher impact.”

Can different management approaches moderate the effect of weather on production? Can firms diversify production and suppliers geographically to hedge against the risk of extreme weather events? “Such questions of adaptation present a challenge for researchers and firms alike,” Olivares says.

Business can’t change the weather. But, in the end, weather may change business.