As the Russia-Ukraine crisis escalates, supply chains, which are on the slow road to recovery owing to the COVID-19 pandemic, have to brace for another round of seismic disruptions across the world.
The fog of war will further complicate recovery, as nearly all markets and businesses will be affected, either directly or indirectly.
Even companies without a direct or Tier 1 supplier in the affected region will see an impact owing to disruptions lower down the supplier chain.
The immediate effect on the supply chain has been the sharp rise in the prices of commodities. This will be exacerbated by supply delays and stoppages from the two countries and the surrounding regions.
Sanctions against Russia, e.g., excluding its four largest banks from SWIFT, will put additional pressure on supply chains.
Food
Russia and Ukraine account for:
Price increase from Feb. 21, 2022 (the day before Russia recognized Donbass) to Feb. 24, 2022 (Russia declared war):
Energy
Europe gets a quarter of its oil and more than a third of its gas from Russia
Metals and Elements
Logistics has been chaotic, expensive, and delayed ever since the pandemic began. A prolonged military battle and wider political instability will worsen already existing supply chain logjams.
Costs for all modes of transport will spike as a result of increased fuel costs, airspace bans, and market volatility. 336,500 TEUs (twenty-foot equivalent units) of cargo were transported from China to the E.U by rail in the first half of 2021. Now, this volume will have to be transported via ocean or air instead of rail, which will cause ocean freight rates to rise from $10,000/container to $30,000/container. Airfreight rates and times may increase three- to four-fold (1).
In the long run, the Russia-Ukraine conflict has the potential to have an extended impact on supply chain strategies. The rising cost of manufacturing output and supply chain execution will force difficult choices on production and pricing, while reduced manufacturing will lead to further price inflation. Rising prices for consumers may reduce the market appetite for goods, especially nonessential and luxury items, which could be a catalyst for higher inflation.
The delays, shortages, and rising prices may also lead to negative effects such as:
Businesses that are not proactively planning for, and executing supply chain risk management processes will be the worst hit.
Addressing the Present
To soften the blow in the short term, supply chain leaders will have to:
Partnering with procurement and supply chain consultants can give organizations access to up-to-date market intelligence, a wider network of suppliers, how their peers are handling the crisis, and innovative solutions to manage the situation.
(1) Gregor Gowans, “Updates as Russia’s Ukraine invasion set to impact Europe’s supply chains,” trans.info, Feb 2021
(2) The Economist, “The Business Costs of Supply Chain Disruption,” GEP, March 2021
Looking Ahead
The events of the past two years prove that disruptions happen all the time. For immature supply chains, the tendency is to be reactive and repeat supplier assessments, which remain largely the same as before but with adjustments reflecting the latest disruption. This is hardly useful in countering risk. After the immediate crisis is managed, companies must look at empowering themselves to handle such situations effectively.
Technology and Analytics: Regardless of the type of disruption, the task of supply chain assessment and management remains the same: to drive effective risk management. To achieve this, a robust infrastructure and systems are vital. Effective supply risk management does not come from one source; companies need advanced tools to analyze data from different sources for a holistic perspective.
Supply Chain Redesign: Redesigning the supply chain to increase flexibility and resilience and to include early warning functionalities will help companies manage suppliers competently and safeguard the business against risk. Capabilities such as end-to-end visibility, scenario planning, what-if analysis, and demand sensing will enable supply chains to deal with unforeseen events quicker and better.
The modern supply chain needs modern tools to help companies assess, monitor, and proactively act upon risks. From developing strong mitigation plans to increasing flexibility, empower your supply chain to ensure disruptions don’t end up having dire consequences for your organization.
GEP helps enterprise procurement and supply chain teams at hundreds of Fortune 500 and Global 2000 companies rapidly achieve more efficient, more effective operations, with greater reach, improved performance, and increased impact. To learn more about how we can help you, contact us today.
Volker Roelofsen, Vice President, Consulting, GEP
Volker spearheads GEP’s growth initiatives and consulting teams in the DACH region and leads large global engagements. He brings in 22 years of experience in consulting, focusing on procurement and supply chain management. He has managed accounts in the automotive, industrial, telecommunication, chemical/pharmaceutical, and consumer. LET'S CONNECT
GEP possesses a full range of procurement and supply chain solutions to help your enterprise assess, prepare and respond swiftly to the disruption caused by the Russia-Ukraine war:
As a global leader in procurement and supply chain transformation, GEP has the expertise and tools to help you mitigate the immediate and evolving implications of the Russia-Ukraine war on your procurement and supply chain operations.
Let’s discuss how we can work with you on this, together.
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