August 9, 2023 - 6 minutes read
How Conflict in Europe is Causing Lasting Supply Chain Issues
These past years have been tumultuous, causing the supply chain landscape to shift dramatically. Having withstood the initial impact of the COVID-19 pandemic relatively successfully, supply chains were dealt another severe blow. With the war in Eastern Europe, supply chains are being asked to adapt to a myriad of new, unique challenges.
To further the understanding of this shift, KPMG developed a dedicated Supply Chain Stability Index to reflect the challenges that supply chains are undergoing. Its initial release shows that the Russia-Ukraine war was the predominant cause of instability throughout 2022, with the stress level reaching its all-time high in April last year.
Throughout this piece, we’ll explore the ‘big picture’ and shed light on the ripple effects that the war in Europe has on the global supply chain. Additionally, we’ll discuss and discover ways of mitigating them in the long run so you can prepare for any disruptions in the future.
High-Exposure Industries
During their research, KPMG analyzed the economic consequences of the war in its early days, identifying supply chains were highly vulnerable during this time.
Energy
The war between Russia and Ukraine cut off the world’s third-largest energy exporter, which increased gasoline and plastics prices. Crude oil prices rose to over US$104 per barrel on April 12, 2022, from about US$90 per barrel just a month before. Industries like transportation, utilities, agriculture, plastics, fertilizers, and metals were heavily impacted.
Diversifying supply is the key in a crisis like this. The uptick in U.S. energy production over the last 20 years has dramatically reduced the country’s dependence on imports, so their economy was able to sustain the lack of products from Russia. But on the other hand, Germany significantly relied on Russian gas imports over the years. Because of this reliance, the German economy worsened as supply chains suffered.
Ultimately, the price of Russian petroleum was capped by a coalition backing Ukraine. But by applying this situation on a smaller scale, one can understand how important it is to have a diverse portfolio of suppliers as opposed to relying on a single source.
Food
Because of the conflict, the Black Sea became impassable for civilian vessels, undermining critical Asia-Europe trade routes. This affected the global supply and price of food commodities, as Russia and Ukraine are responsible for 29% and 17% of global wheat and corn exports, respectively.
In the first week of March 2022, Chicago wheat futures soared to an all-time high of US$13.50 per bushel, resulting in higher prices for wheat-dependent food products and animal feeds. This, in turn, drove up prices for animal protein, dairy, and egg products.
This is another example of diversification being useful. Route disruptions won’t always be as severe as this one, but having multiple options when it comes to suppliers is beneficial in the long term.
Semiconductors
Prior to the war, Ukraine supplied over 90% of the United States’ semiconductor-grade neon, while Russia supplied one-third of its palladium and one-fifth of semiconductor-grade nickel globally.
To prevent existing shortages from worsening, semiconductor manufacturers started establishing sites in the United States and neighboring countries—check out the graph below for more.
Lessons Learned
Jim Kilpatrick, a Global Supply Chain leader with Deloitte Canada offered ways to combat the adverse outcomes of the war in Europe. His advice may be transformed into an actionable checklist for anyone willing to become nearly immune to turbulences of similar magnitude in the future: be diverse, be flexible, and be tech-savvy.
Be Diverse
For several decades, companies have been reducing inventory levels and establishing safety stock to mitigate the effects of demand and supply fluctuations. However, the war has highlighted that such traditional inventory buffers are inadequate during times of crisis.
Numerous companies did not foresee these supply-side risks and are now left with lean and possibly inefficient inventory to navigate an extended period of disruption. A scarcity of even a single component, like a wiring harness produced in Ukraine, can bring to a halt the production of a car.
To tackle this issue, include a policy for maintaining a “strategic stock” of critical materials as a vital component of your overall inventory policy.
Having multiple sources for essential inputs is key to remaining stable and weathering a crisis. It’s important to have secondary supplier relationships in place to ensure you can promptly obtain extra critical inventory and capacity if needed. When choosing alternative sourcing locations for vital commodities, try to avoid getting into already crowded supplier hubs.
Be Flexible
Russia’s invasion has disrupted traditional supply routes, highlighting the need for flexible logistics in designing global supply chains. Even before the war, companies were grappling with complex logistical hurdles: port congestion, insufficient availability of shipping containers, lengthy lead times, and high ocean freight rates.
The current escalation of oil prices is only further exacerbating inflationary pressure on transportation services. Shipping activities in the Black Sea are increasingly difficult to manage; the landscape of air freight and routes is shifting as flights are redirected to avoid restricted airspace over Russia and Ukraine. Furthermore, the freight trains that were previously a dependable means of transporting goods from China to Europe via Russia, Ukraine, and Belarus now may be inaccessible.
As pressure mounts, businesses are considering nearshoring and onshoring. Onshoring can offer greater control and stability by reducing dependence on foreign sources. But sometimes, a lack of natural resources, expertise, or sufficient market size could present a substantial bottleneck.
In such cases, friendshoring, which involves replacing precarious foreign suppliers with trusted allies and partners, can be a practical solution to consider. According to McKinsey, this trend is accelerated by the ongoing war, with Canada and Mexico surpassing China to become the top trading partners of the United States in 2021.
Consider tracking the sourcing of critical commodities and the geographic regions from which you acquire them to assess supply chain vulnerabilities. As seen from the effects of the war, overreliance on one region or country can result in unnecessary risk.
Always stay up-to-date with the most recent developments and be ready to adapt logistics strategies and financial plans accordingly. Advanced technologies, such as AI, can aid you in identifying geographic clusters that geopolitical events may impact.
Be Tech-Savvy
While Russia may not seem as crucial as other countries in the web of global supply chains, a closer look beyond direct suppliers tells a different story. To create a resilient supply chain, visibility—something you can significantly improve with software like Agistix—is essential and should encompass the entire network.
A Deloitte survey revealed that only a limited number of companies were confident they could anticipate risks in their Tier-1 supplier base, let alone detect potential issues in their upstream suppliers.
To gain deeper insights into potential risks, consider implementing “control towers” that utilize AI and advanced analytics to provide up-to-the-minute data visibility, early warnings, suggested actions, and self-governing execution. That way, you’ll be able to identify suppliers and commodities that pose a significant risk both within your direct base and extended network (your supplier’s suppliers).
The ongoing war has also highlighted the need for increased focus on cybersecurity risk monitoring. Adopting appropriate measures to protect your operations and sensitive information is necessary. Additionally, monitoring the cybersecurity practices of key suppliers within your supply chain is vital. This includes investing in cybersecurity technologies and regularly testing and updating your systems and protocols.
