COMMENT: How international supply chains are contending with the war in Ukraine

COMMENT: How international supply chains are contending with the war in Ukraine
The war in Ukraine is exporting its pain by disrupting supply chains, causing a ripple effect. Companies are forced to switch from "just-in-time" delivery to "just-in-case", which is having profound consequences. / WIKI
By bne IntelliNews June 15, 2022

When Russia invaded Ukraine in late February, international supply chains were still fragile after the massive impact of coronavirus (COVID-19). Although the devastating invasion is not causing the same kind of impact on shipping routes as the initial quarantine lockdowns of March 2020, when planes were grounded and ports closed all over the world, it’s nonetheless affecting supply chains enough to cause significant difficulties for organisations and individuals the world over.

“The Russia-Ukraine war is likely to exacerbate and elongate global supply chain disruptions,” says Kenneth Kim, senior economist, KPMG US. “Although the US does little direct trade with Ukraine or Russia, certain US businesses and industries face significant exposure from the war,” he explained. "Indeed, we’re already seeing widening ripples of turmoil in numerous sectors."

Transportation routes have been disrupted

One of the biggest effects of the war has been to interrupt the China-Europe rail link, which passes through Central Asia and Russia to bring components built in the Far East to markets in Europe. In 2021, millions of containers travelled this route, which is several weeks faster than shipping by sea.

Now importers and logistics providers are in a bind. Sea freight from China is still unpredictable, due to the government’s “zero COVID” policies that are still shutting ports, and Ukrainian Black Sea ports are blockaded by Russia, affecting vital grain, cooking oil and semiconductor chip exports. Most of the aforementioned rail routes are unusable, and air freight is both expensive and impractical, since flights have to divert around Russian airspace.

At the same time, the rising cost of fuel is bringing higher transportation costs, with predictions that shipping rates will triple for ocean carriers and air freight. The result is that goods are stranded en route or stuck at the point of production, and destination markets are running short of components, food and finished goods.

Against this backdrop of increasingly frequent and significant disruptions to transportation routes, companies and governments alike need to build the supply chain anew for resiliency, not just for low prices.

These leaders need to be able to make swift decisions on the fly, switching routes, logistics providers and transport methods. But that kind of agility is only possible with early warnings about blockages, changing transportation prices and the condition of the goods concerned, which, in turn, requires visibility into logistics at every stage of the game.

Niko Polvinen is SVP of business development at Logmore, a logistics condition monitoring startup based in Finland. “My team has been keeping a close eye on the situation in Ukraine, and our hearts go out to everyone who has been impacted by the humanitarian crisis,” he says. “We're seeing significant disruptions in the region's shipping routes, such as shipments of Ukrainian wheat stuck in Odesa while exporters look for alternative ways to transport it by land.”

“The specifics of this situation surely have their own parameters from a problem-solving perspective,” Polvinen adds, “but as the world has learned from the continuous disruptions of the last three years, supply chain resilience hinges on transparency and data visibility for all involved parties. No matter what the specifics of the crisis at hand might be, supply chain stakeholders can only be proactive about making adjustments – and about managing expectations of others down the chain – if they know what's actually happening with their shipments.”

While real-time visibility is key to agile problem solving, organisations must also give themselves more time to make these tough decisions by stopping the trend to reduce stockpiles of vital items that are most likely to be disrupted. There needs to be a move towards strategic stockpiling that lowers the risk of suddenly running short of crucial stock.

“Many of the finely tuned just-in-time and lean systems will be replaced or supplemented with business models incorporating buffer inventories and safety stocks,” predicts Mark Millar, the author of Global Supply Chain Ecosystems. “In many scenarios, just-in-time will become replaced by just-in-case,” he adds.

Interconnected supply chains are suffering from events upstream

On the face of it, neither Ukraine nor Russia are global trade powerhouses, but that facade cracks when you realise the interconnected nature of today’s supply chains.

While there are only 14,745 Tier 1 supply links with Russian manufacturers globally, according to Dun & Bradstreet, the number jumps to 7.6mn for Tier 2 connections. Over 600,000 businesses around the world rely on suppliers in Ukraine and Russia, putting many economies at risk if those relationships fail.

For an especially pertinent example, look at world trade in semiconductor chips, which still hasn’t recovered from the disarray of the pandemic. Ukrainian companies account for half the world’s neon production, critical for the lasers used in chipmaking. Two crucial companies in Odessa and Mariupol have closed their operations because of the war. Meanwhile, Russia is responsible for approximately a third of global palladium, necessary for sensor chips.

Without those chips, industries including connected cars, smartphones, and industrial and medical devices are all affected. If the war continues to be prolonged, we could start seeing serious effects on manufacturing, healthcare and consumer goods sectors. Several car manufacturing plants have already stopped production, resulting in more lost jobs and lower retail activity, all at a time when the global economy is trying to recover.

Meanwhile, every sector is affected by disruptions to the oil trade, and the UN is warning of severe famine in the near future because Russia and Ukraine together account for a significant percentage of global supplies of wheat, cooking oil and barley, and Russia is also a major global exporter of fertilisers.

“For those companies continuing operations in Russia and Ukraine, it will be critical to focus on the safety of the workforce and to prepare for significant disruption to logistics infrastructure and other supply chain partners,” says Jim Kilpatrick, Global Supply Chain & Network Operations leader at Deloitte.

Research by Deloitte revealed that only 26% of chief procurement officers felt that they could predict risks in their Tier 1 supplier base, let alone anticipate issues in suppliers further upstream. That’s problematic when you remember that most connections with Russia are at the Tier 2 level, making them all but invisible until the cracks spread.

It’s clearly impossible to stress-test a supply chain network if you’re not even sure who comprises it, so companies need to quickly gain oversight into their entire supply chain.

Sanctions affect a growing ring of suppliers

One unique aspect of the war in Ukraine is the need to avoid sanctioned Russian entities. Analysts at Dun & Bradstreet have estimated that sanctioned Russian individuals and institutions are involved in close to 17,000 entities, totalling hundreds of thousands of supply chain links to Western companies in critical infrastructure and defence alone.

Not only do companies have to shun Russian suppliers, but they are also obligated to cut ties with any partner, supplier or client who does not respect Western sanctions. Much of Latin America and Asia refuses to fall into line, and they form a significant business base.

With companies suffering supply issues both because of knock-on effects of disrupted routes and the need to avoid sanctioned firms, the imperative to reshore supply chains has skyrocketed. The closer supply chains are to home, the more control governments and companies have over their components and the less they are dependent on possibly volatile foreign countries.

Governments are kicking into gear, with the recent US CHIPS Act and European Chips Act both aimed at bringing vital semiconductor chip production to those areas. However, onshoring isn’t always possible, which is why companies are also nearshoring, friendshoring, and diversifying suppliers.

Nearshoring means that components have a shorter journey to your factories or end customers, reducing the risk of transport disruptions along the way, and friendshoring involves relocating production to countries where friendship ties are strong and there is less likelihood that a trade war could hobble exports.

Diversification is common sense once you accept that even the strongest supply chain is vulnerable to interruptions, so you need to be able to pivot quickly to a new supplier when necessary.

“You can think about having a portfolio of suppliers the way you have a diverse portfolio of stocks,” says Nada Sanders, a distinguished professor of supply-chain management at Northeastern, by way of explanation. “And still, all this is the best-case scenario, in some respects, with this war. The outcomes could be so dire for so many that the supply chains would be the least of our worries.”

Mitigating the risk of supply chain shocks

The war in Ukraine has underlined the vital need to face and deal with supply chain issues today.

“The Ukraine war and closer alignment of China and Russia will modify profoundly the exchange of energy, raw materials, industrial parts and goods between the Western world, China and Russia, and promise to accelerate the reshoring trend,” write MIT academics David Simchi-Levi and Pierre Haren in the Harvard Business Review. “About the only thing certain right now is the challenges to global supply chains are going to increase for the foreseeable future.”

It’s no longer possible for companies and governments to stick their head in the sand and ignore supply chain threats. It’s clear that we need risk mitigation and scenario planning on a global scale, including short, medium and long-term solutions such as opening up visibility into the supply chain, baking in resiliency, and creating new supply chain relationships.