How To Mitigate the Impact of the Russia-Ukraine War on Your Global Supply Chain

Russia-Ukraine Crisis

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.

Impact of the Russia-Ukraine Conflict

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.

Escalating Commodity Prices and Shortages

Food

Russia and Ukraine account for:

29% of global wheat exports
19% of the world’s corn supply
80% of global sunflower oil exports

Price increase from Feb. 21, 2022 (the day before Russia recognized Donbass) to Feb. 24, 2022 (Russia declared war):

Wheat: 16.5%
Corn: 6.3%
Sunflower oil: 5.9%

Energy

Europe gets a quarter of its oil and more than a third of its gas from Russia

Oil prices have shot up to over $110/ barrel for the first time since 2014
Gas prices in Europe have risen 70% in 2022

Metals and Elements

Russia and Ukraine lead the global production of metals such as nickel, copper, and iron
Russia and Ukraine export and manufacture significant volumes of raw materials such as neon, palladium, and platinum
The trading price of palladium is approx. $2,850 per ounce, up over 80% since mid-December
Nickel prices rose by over 6.5% in the three days after Russia recognized Donbass

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:

Damage to company brands and image reputation
Liquidity and delayed cash flows
Drops in customer confidence and market share
Loss of revenue – 64% of respondents in the GEP 2021 Cost of Supply Chain Disruption Survey reported losses between 6% and 20% (2)

Businesses that are not proactively planning for, and executing supply chain risk management processes will be the worst hit.

How To Ride the Wave of Supply Disruptions

Addressing the Present

To soften the blow in the short term, supply chain leaders will have to:

Set Up a Cross-functional Team: Develop and implement robust mitigation plans for different scenarios working alongside cross-functional teams.
Assess Impact of the Crisis: Businesses across industries will be affected by the crisis. Organizations must analyze the range of factors - from the geographic location of their key suppliers and rising commodity and fuel costs to demand volatility, increased cyber threats, and cash flow - to gauge the extent the Ukraine crisis will impact them.
Manage Supplier Relationships: In large-scale disruptions such as these, suppliers will be inundated with an avalanche of requests. Companies need to ensure that their requests remain relevant and focused to allow suppliers to function effectively.
Consider Portfolio Realignment: Businesses should consider their product portfolio, gain a realistic understanding of what can and cannot be manufactured in the (near) future, and consider manufacturing reinvention as a potential solution.

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.

Turn Ideas Into Action. Talk To GEP

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

Rapid Response and Partnership Solutions From GEP

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:

Supplier Assessment and Mapping
Surety of Supply Team
Rapid Category Reviews
Transport and Warehouse Support
Commodity Risk Management Strategy
Security Review

GEP Is Uniquely Positioned To Help

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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