Ukraine Conflict Further Disrupts Under-Pressure Global Supply Chains

The conflict in Ukraine is piling further pressure on already stretched global supply chains. How can increase risks and issues be mitigated?

Behind the tragedy unfolding in the city streets and fields of Ukraine as the country comes under attack from Russia, the very concept of a global economy is coming under fire.

The airspace over Russia is clear of any civilian aircraft. Companies are closing operations and blocking access to software applications. McDonald’s, Coca Cola and Starbucks have decided to impose their own sanctions on Russia.

Trade experts say the conflict simply highlights the extreme globalisation behind the world’s economy. While open trade has its merits, it’s clear that upheaval in one region can have a significant impact on the other side of the globe.

Sea Freight Landlocked, Air Freight Grounded

At the same time as Procurement and Supply Chain professionals are scrambling to cope with the challenges of diverted vessels and aircraft, they’re also dealing with the entirely unexpected issues that crop up as a direct result of the conflict.

For example, some 20,000 workers at 29 ports on the West Coast of the USA said they would not load or unload any Russian vessels or Russian cargo. Action like this leaves companies with no direct stake in the issue unable to access their paid-for products that will now languish on a ship for who knows how long.

The destruction of Antonov Airlines’ giant AN-225 cargo jet takes the option of airlifting jumbo-sized cargoes off the table. The grounding of the rest of Antonov’s fleet of large jets eliminates outsized project cargo, hitting shipments of bulky items like generators and refining equipment, as well as satellites and aerospace components.

Suspension of air freight on Russian air carriers will stress an already tight air cargo market. Overall, average flight times are rising as airlines avoid airspace over the region.

Companies React To Unstable Situation

European automakers such as Renault SA, which owns AvtoVAZ, the Russian company that makes the Lada brand, Volkswagen AG and its brands Audi, Skoda, and sports-car maker Porsche, are among the hardest hit by the sudden cessation of business in Russia, and the lack of vital parts from suppliers in Ukraine, the Wall Street Journal has reported. 

Industry-wide, more than 10 automakers suspended business in Russia, with some shutting factories indefinitely. Russia’s exclusion from the SWIFT international interbank payments system has only made the situation harder to manage for those doing business in the country.

At the moment, there’s not much any company can do if they find their supply chain is severed due to the conflict. Within Russia, companies attempting to continue operating are cut off from inbound shipments from international suppliers.

“I find it difficult to conceive of any contingency plan for companies unless Russia somehow reshores its nonessential supply chains,” Cormac McGarry, a maritime analyst with the Control Risks consultancy, told Foreign Policy magazine.

Huge Uplift in Supply Chain Risk

Risk management consultant Interos identified supply chain risks due to more than 2,100 US-based firms and 1,200 European firms having at least one direct, Tier-1 supplier in Russia. More than 450 firms in the US and 200 in Europe have Tier-1 suppliers in Ukraine. At the Tier 3 level, more than 190,000 firms in the US and 109,000 firms in Europe have Russian or Ukrainian suppliers.

Interos noted that software and IT services account for 13% of supplier relationships between US and Russian/Ukrainian companies. Consumer services represent another 7%, while around 6% account for trading and distribution services and 4% for industrial machinery. 

Even if your supply chain is not directly impacted, expect costs for fuel, metals and commodities to escalate. Russia provides over a third of the European Union’s natural gas, and threats to this supply could force up prices when companies and consumers are already facing higher energy bills. Interos has reported that the invasion could send oil prices spiralling to $150 a barrel, lowering global GDP growth by close to 1%, and doubling inflation. Even lower estimates of $100 a barrel would cause input costs and consumer prices to soar.

The invasion could continue to squeeze metal markets. Russia controls roughly 10% of global copper reserves and is also a significant producer of nickel and platinum. Nickel has been trading at an 11-year high, and further price increases for aluminium are likely with any disruption in supply caused by the war. Ukraine is also a key source for critical materials like purified neon used in semiconductor manufacturing.

Heightened Risk of Cyber Attacks

The risk of cyberattacks is high with this conflict. Both Russia and Ukraine are renowned for their cyber warfare capabilities and are home to groups involved in malicious cyber activities.

In this situation, cyber attacks aren’t targeted at stealing data but will focus on disrupting supply chains to stop operations that support the other side in the conflict.

Cyber security experts remind companies to tighten their internal security practices. Taking basic steps such as implementing multi-factor authentication for access to email and networks could stop attacks before they start. Employees should be reminded to use strong passwords for work and personal accounts and follow clear instructions on reporting attempted breaches.

Focus on Supply Chain Risk Management

If the US-China trade conflicts and the pandemic didn’t prompt your organisation to undertake a comprehensive risk management program, perhaps this conflict will inspire action.

Risk mitigation involves monitoring situations that could impact your supply chain and developing alternative sources and routing ahead of time. Of course, it’s not always possible to stay ahead of fast-breaking world events. But it’s wise to develop contingency plans for critical spend and suppliers in areas of high risk.

Steps to develop supply chain risk mitigation

• Evaluate critical levels of inventory and labour
• Develop business continuity planning with critical suppliers
• Nurture alternative sources for essential goods and services

Supply chain visibility is still not as good as it should be for most companies. During the Ever Given blockage of the Suez Canal, it took weeks for companies to determine whether their shipments were on the vessel. Companies have about 90% visibility in the first tier of suppliers, but it falls off severely in the second and third tier, Koray Köse, senior director analyst at Gartner Supply Chain and Research Advisory, said in a recent podcast.

Ultimately, the Ukraine crisis is not a new crisis. It’s an extension of the same crisis supply chains have dealt with in the past. The main issue it is highlighting is an ongoing lack of resilience in supply networks and ecosystems.

“You need to think about your production plans, your delivery plans and move them wherever you can to stretch the inventory buffer that you have,” Köse said.

Are you putting measures in place to reduce risk in your supply chain? Let us know what your company is doing in the comments below.