The Russian invasion of Ukraine is underway. As promised, the United States has imposed sanctions on Russia, targeting large financial institutions, sovereign debt, Russian elites, and associated family members. Germany, one of the key allies of the U.S., halted certification of an underwater twin pipeline that would transport natural gas from Russia directly to Germany under the Baltic Sea.
How do these events impact global supply chains that are still recovering from the Covid-19 pandemic, and what steps should companies be taking to address current concerns as well as prevent future disruptions?
Global Supply Chain Impacts
Russia and Ukraine are key global suppliers of three primary commodities:
Russia is a key supplier of oil and gas. Europe gets almost 40% of its natural gas and 25% of its oil from Russia, with Germany importing the most energy resources. Even if Russia doesn’t cut off or limit oil and gas to Europe as a retaliation for sanctions, Europeans will most likely experience additional increases in heating and gas bills – which were already soaring, up more than 50% from 2020.
While the U.S. imports very little oil from Russia, oil prices are set by the global market. American companies should expect higher oil and gas prices, driving higher transportation costs.
Russia is the world’s largest supplier of wheat, and together with Ukraine – the “breadbasket of Europe” – accounts for 25% of total global exports of wheat. Russia also supplies significant amounts of soybeans, corn, barley, and other grains and oilseeds, in addition to potash, potassium, and fertilizer. Decreased supply and increased costs to European food manufacturers and consumers could contribute to increasing inflation in Europe and beyond.
Russia is also a major exporter of metals such as aluminum, copper, cobalt, and nickel, and is the world’s largest exporter of palladium, with over 20% of the global market. Palladium is a rare metal used in catalytic converters – so the automotive supply chain, already struggling from global computer chip shortages, could see additional shortages and cost increases. Medicine and semiconductor/tech manufacturers also rely on some of the rare metals that Russia supplies.
While markets typically bounce back after geopolitical events, many of the impacted markets are already experiencing high inflation, strained supply chains, and uncertainty around prices. The invasion of Ukraine could slow economic activity and add to the price increases.
Assessment and Preparation
To address current concerns and to prevent future breakdowns in supply chain, U.S. companies need to have a deep understanding of their supply networks. Supply chain leaders cannot predict worldwide disruptions, but mapping the end-to-end supply chain and understanding the various inputs and outputs is essential for industries to survive disruptions. Supply chains should be optimized for cost, service, resilience, and flexibility in sourcing, production and distribution networks.
When evaluating the procurement of materials, companies need to identify key vendors, the location of those vendors, and their storage and transportation locations and methods. Companies should also look beyond their first-tier suppliers to understand their vendors’ supply chains, as they will most likely be impacted as well.
Understanding a company’s reliance on supply from a given region is key to knowing what the impact of disruptions could be. For example, auto companies may have established relationships with the OEMs that manufacture catalytic converters, but understanding where the palladium in those devices is sourced will enable quick responses to disruptions in sourcing regions.
Multi-vendor relationships can improve the likelihood of obtaining the materials required to support a company’s needs. Diversifying an organization’s supply base across suppliers and geographies can buffer against regional disruptions. Multi-sourcing can also extend to include service providers, such as transportation carriers. Whether a vendor provides materials or services, collaboration and communication are vital to successful partnerships. Providing clear visibility of demand is fundamental in securing what is required for a company to remain successful. Additionally, flexibility within an internal production network allows companies to react to situations that impact a single production facility or a single region.
Supply Chain Processes
From a customer service perspective, defined processes can help manage customer demand if allocation, product triage, or substitution of products is required. Sales and marketing input on priority customers and products can help supply chain and operations focus on the needs of the business and assist in the appropriate distribution of goods or services. It’s important for companies to think through the processes for prioritization and allocation in advance of disruptions, so that they are ready to deploy these processes when the need arises.
Systems can be utilized to quickly provide visibility to disruptions. Data paints the picture as to where an organization needs to focus its efforts. There are a variety of software tools that can quickly identify impacts to raw materials – such as metals – and associated saleable goods that utilize those metals. Further, forecasting and planning tools can provide clear visibility to current and future needs, and can help simulate response scenarios. Information can be shared internally across the organization and externally with vendors to aid in preparedness.
Whether there is a global pandemic or an international conflict, we can be sure that unexpected supply chain disruptions will occur. Supply chain leaders should evaluate their organizations now, and plan for how they can be prepared to respond in the future.
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Contributions by Kate Poknis, TJ Keys, Liz McGuire, Linda Plumley, and Madeline Smith