Just as one source of disruption in the shape of the COVID-19 pandemic seemed to be passing, another crisis arises for the supply chain as conflict hits a region that is enmeshed into our everyday lives. According to research from Achilles’ Supply Chain Resilience Report, global supply chains had begun to show signs of plateauing following two years of Covid-19 disruptions.
As a foreword, we can’t begin to imagine the challenges, difficulties and tragedies that the people of Ukraine are suffering. This article seeks to apply a supply chain lens through which we can frame the invasion as we seek, simultaneously, not to diminish the human cost of the conflict.
Economic and industry experts broadly agree that the impact of Russia’s invasion of Ukraine will have a devastating effect on many western economies for a multitude of different reasons. The length of the impact is also a widely discussed topic, with some experts anticipating difficulties for 6 months to a year after any conflict has ceased.
Assessing the Impact
In a broad sense the disruption can be classified across six dimensions:
Unfortunately, a huge amount of the supply chain relies on oil production to function. Not just for energy and transport (discussed below) but also as a raw material in other production processes. Oil prices are surging, with costs at the pump being an indicator for most of us. Even if Russia export a small percentage of Oil to the UK directly, the nature of oil being entrenched into our economy and other European and US economies will have a massive impact on both costs and delays in production. Transport costs of goods will continue to rise, alongside the cost of oil-heavy production such as plastics.
Many western counties rely on Russian gas for energy production and sanctions against the country will inevitably drive prices higher for the commodity. Some countries have the luxury of being able to boycott Russia, but a great number do not. Despite there being obvious moral principles to the sanctions and clear objectives to halt the invasion, it’s not always possible to source such core supply chain inputs at short notice.
The rail transport route between Asia and Europe will be massively disrupted by the conflict as air space is closed, more pressure is put on the rail system. So delays are inevitable across many industries. Air Cargo may not represent a huge amount of tonnage, but 35% of world trade in terms of value is moved by air.
Imports from the region
Even considering the oil and energy imports from Russia mentionsed above, Russia exports agricultural products such as wheat, corn, and sunflower oil (India, China, the Netherlands, and Egypt are large consumers) and both Ukraine and Russia export large amounts of metals. In some European countries, there is a massive reliance, even dependence, on the region for these raw materials. Even if volumes are not high, the EU gets 30.1% of its nickel imports, 48.5% of semi-finished products of iron or steel and more than 20% of copper and platinum from Russia.
Exports to the region
Exports to Russia from the EU are varied, but some of the largest reliance industries (where Russia represent a large share of business) are:
- heating and cooling equipment
- pumps, gas and other air compressors
- parts and accessories for motor vehicles and aircraft
- machinery & equipment
- medical and pharmaceutical goods
So sanctions and additional paperwork, alongside transport headaches all combine to create massive issues ahead.
As an additional set of difficulties to add to the transport category above, 10.5% of all seafarers come from Russia and 4% from Ukraine, according to the International Chamber of Shipping. In the Black sea, many crewed vessels are stuck due to hostilities and port closures. There has been much discussion about the truck driver shortage across the EU, so the 4-5,000 drivers currently held up in Ukraine is exacerbating this pressure – despite it being a very small percentage overall.
When systems are strained, as they have been over the last couple of years, they are more susceptible to fluctuations. If the pandemic highlighted resilience in the supply chain, this new conflict has magnified the vulnerabilities in ways not seen for decades.
Managing Your Supply Chain Crisis
Whether directly or indirectly affected by the conflict, there are certain practices that we can all do to mitigate the risk faced by the current crisis and any future uncertainty.
If you can’t see it – you can’t take action on it. The more you have clarity throughout your supplier base and visibility through the supply chain, the more chance you have of implementing successful measures to make your company more robust.
We believe this starts with amassing data on the supply chain and revisiting the data you have to see if you have gaps in the completeness of your data for all projects or product lines. Perhaps the data you do have isn’t relevant in the current context, so reaching back out to the suppliers to fill those gaps is essential. Look at your dependence on certain suppliers and understand the potential risk of their suppliers too.
Once you have the visibility above, you can then start to analyse and evaluate the risks involved. This could mean spreading your business more widely as risk mitigation, based on how those suppliers are obtaining their raw materials. It could be re-engaging with suppliers where relationships have lapsed due to price, but now are of more value because they hold stocks you can reserve and fortify your supply chain with.
With data at your fingertips from a Supplier Relationship Management platform like SourceDogg, you can also assess where your suppliers have room for improvement, or where they are likely to let you down. If you then throw a conflict into the mix – how will this affect their reliability further and should you begin a buying event to mitigate risk?
As with many supply chain value analyses, time and money are important factors in the decision-making process. However, as there may be a lot of uncertainty in key markets and industries, your focus may switch to the objective of agility. With this in mind, the risk calculation begins to look distinctly different – can you afford not to buy added stock to cope with shortages? What is the financial impact on cash flow now vs. the potential loss of business later?
No one can predict the future, but we can be certain that trade flows will be reshaped significantly over the coming months.
From a supply chain perspective, it pays to have clarity on your tier 1, 2 and 3 suppliers and their operations. This means you can plan more effectively and make data-driven decisions with agility as a focal objective.
We sincerely hope that the conflict resolves quickly, without more tragic and unnecessary loss of life. We also hope that the impact of the invasion and economic sanctions don’t stifle your business’s success as this can also have poor outcomes beyond the region and those directly involved.