The war in Ukraine has already resulted in incalculable misery and human suffering and extensive destruction of infrastructure. The first priority has been that of concern for those affected directly by the unfolding humanitarian crisis. This has triggered a coordinated policy response internationally. Governments will also need to respond to the war’s impact on global trade. 
There will be no business as usual. With no clear end in sight, business leaders are facing many important questions about how to respond to the war’s profound impact on procurement and its disruption to international supply chains. As the crisis persists, here are some of the most significant areas to consider:

Emerging procurement and supply challenges

The immediate impact of the war is seen on the commodities markets, particularly oil and gas, which were already experiencing accelerated price inflation prior to the crisis. Many people are only now coming to realize the impact will not be limited to oil and gas but will impact many manufacturing areas, including food processing and even semiconductors.

The impact is wide because of the breadth of Europe’s interdependence. Russia and Ukraine are very major suppliers of a variety of basic materials such aluminum and iron, as well as rare metals such as platinum, nickel, and palladium. The two countries produce 90% of the world’s total neon gas, a key product in a number of high-tech manufacturing areas, including semiconductors.

Food production will be disrupted globally the United Nations (UN) forecasts, and is likely to lead to a strain world food supplies. The leading science journal Nature reports that Ukraine and Russia contribute nearly one-third of all wheat exports, one-third of the world’s barley, one-fifth of its corn and three-quarters of all sunflower oil exports, providing an estimated 11% of the world’s calories. Russia is by the largest supplier of nitrogen fertilizer and second largest supplier of potash fertilizers.

Understanding the war’s impact on supply

Both the armed conflict, as well as trade embargos and sanctions, have sent profound shockwaves through global supply chains, resulting in longer transportation routes for the delivery of raw materials and higher costs associated with alternative supplier sources. Our research, in partnership with NERA Economic consulting, shows that these effects are not limited only to the facility directly impacted, in terms of higher overall cost of production and doing business, but also in their effect on industries utilising the goods it manufactures (forward linkage) as well as those supplying other production inputs to the facility (backward linkage). In addition, the model examines the physical and regulatory bottlenecks that can emerge due to the disruption.

Responding to the war’s impact on procurement and supply

The impact of the war will have three different types of impact on procurement and supply: First, the impact on the manufacturing production base, second, the impact on global raw materials markets, third, the impact on trade routes and supply chains.

Impact on the manufacturing production base

Numerous production facilities located in Ukraine and Russia have been fully integrated into Western European manufacturing supply chains over the past few decades. Several European automotive suppliers, for example, have moved production operations from North Africa to sites in Ukraine a few years ago. Automotive manufacturers are particularly reliant upon Ukraine for wire harnesses, an indispensable component in every car.

Impact on global raw materials markets

Supply chain disruption and potential trade bans have considerable implications for an organization’s cost base, meaning procurement leaders must rethink their procurement strategies.

Currently, the largest discussion around the war in Ukraine is the import ban of Russian oil to the EU. While Russian imports only constitute for 2% of the European demand, it is expected that a ban will lead to higher prices and thereby could impact the business models of energy- and fuel-consumptions industry such as chemicals and logistics. Assessing these risks now and developing the right mitigations strategies is of paramount importance to secure margins. Re-visiting and calibrating the hedging approach can be a first step towards securing raw material prices in procurement. On a more medium-term basis, a solution could be to accelerate the transition to gas- or electricity-based mobility in the transportation sector.

Impact on trade routes and supply chains

Several major logistical routes have already been cut and others changed to avoid Russia and Ukraine. Some of this impact will be felt in the short-term and will have immediate economic consequences such as rising transport costs. Other outcomes are likely to be much longer-term in nature, especially if we look at their impact on strategic projects in terms of lower investment and productivity.

On- or near shoring, for examples, was in recent years a strategic approach to increase flexibility and sustainability in the supply chain. Setting up production locations close to their core markets, helped companies in all industries to lower delivery times, have more control over Environmental Social and Governance (ESG)-related matters and maintain high productivity levels at lower cost. Considering the current supply chain disruptions, these strategies must be revisited. Companies face the difficulty to decide how their future production footprints and supply chain should look like to not lose the benefits of the past.

Overview of supply disruption

All transport modes that involve transit through Russian or Ukrainian territories are facing major disruption. This disruption is having knock-on effects on trade routes more generally. The current situation is summarized below.

Russian airspace is closed to Western airlines. This has led to European Union (EU) logistics companies to stop all shipments to Russia. Air cargo to Asia has been diverted to longer routes, adding up to twelve to fourteen hours flying to northeast Asia, for instance. There will also be a severe impact on air cargo capacity on these routes.

Many of the rail routes from China and the Far East transit through Russia, Ukraine and Belarus on their way to Western Europe. During 2021, there were over 1,200 freight trains a month between China and Europe, transporting almost 1.5 million containers. All such rail freight movements are interrupted or cancelled.

Road transport has been impacted by the sudden loss of Ukrainian drivers. Polish transport companies alone employ ~100,000 Ukrainian drivers. Many have joined the army or returned home. Prior to the war, Poland was already short of about 120,000 drivers, equal to approximately one-third of its present needs.

Sanctions against Russia are starting to have an impact on shipping. Major shipping companies have already suspended cargo bookings to and from Russia. Blockades are also impacting sea transport and causing congestion around the Kerch Strait, the channel connecting the Black Sea to the Sea of Azov. Port congestion in the US, China and the Far East was already a major problem even prior to the conflict; this congestion is likely to increase.

Immediate and strategic responses

The first task is to set up a crisis management taskforce to respond to the immediate situation. The taskforce’s objective will be to manage supply by securing capacity and monitoring the rapidly changing supply chain situation. Its ongoing role will be to manage emerging procurement and supply shortages as they arise and to adjust to transport and logistics challenges.

In the medium-term, it will be necessary to rethink the overall flexibility of the inventory strategy. The objective needs to be to build in greater resilience through combining alternative supply sources with multiple transport options. The key to success is to ensure that procurement and supply are not reliant upon any one supplier or transport mode. In effect, this will mean establishing several parallel supply chains.

Supply chain resilience is now the number one goal

Today’s strategic imperative needs to be to increase supply chain resilience. Dual or multi-sourcing strategies are likely to become the norm. Such strategies need to feature a variety of suppliers in multiple locations. Greater resilience can also be created through additional stock reserves. The overall approach to procurement and logistics management will need to be modified to accommodate the increased complexity resulting from supplier and transport diversification.

As part of this review, this is also the opportunity to revisit the overall supply base and to identify sources of supply closer to home. This includes examining the potential for on-shoring the supplier footprint and for shortening supply lines so that they are more resilient to future shocks. The decision will also need to be made about whether certain transport capabilities critical to supply should be brought back in house. In some instances, for example, this might include owning air freighters to transport vital parts of high value.

The war in Ukraine will continue to make it very challenging to maintain supplies, not just from the areas impacted directly by the war, but also due to its impact in fracturing long-established transport routes. The price of transport services is almost inevitably going to continue to rise for some time as a result, due to ongoing capacity constraints and worker shortages. Resulting commodity shortages and continued hydrocarbons price volatility will also have an ongoing impact.

The big lesson is that resilience is all. Proximity of supply and flexibility in sourcing have become major virtues.