March 2022 | Point of View

What the Russia-Ukraine war could mean for the supply chain

The crisis in Ukraine will force supply chain leaders to adapt to a rapidly changing environment—responsiveness and agility will be critical to success

By Ian Nugent

The COVID-19 pandemic forced business leaders to anticipate volatile global conditions to manage their supply chains. The trend of supply chain leaders serving as fortunetellers sees no signs of slowing with the geopolitical crisis unfolding between Russia and Ukraine bringing another round of supply chain disruptions—with ramifications especially for industrial and consumer brand owners.

No doubt exists about the emergence of new challenges. Business leaders are presented with energy disruptions driving surging fuel costs, material shortages that have already driven commodities cost up across the board, and uncertainty that impacts unforeseen, disparate areas.

However, as made clear by COVID-19, business doesn’t stop when faced with challenges—leaders adapt to changing conditions. It will be no different during this crisis. Without a crystal ball, the actual consequences may elude us, but here are the four considerations that should be top-of-mind for supply chain leaders.

Supply chain contraction

Any interstate conflict will come with interruptions to existing systems, and the Russia-Ukraine war provides no exception. In this instance, interruptions to transportation lanes, decreases in international cooperation, and increases in shipping costs are at the forefront of concerns.

Long-standing supply chain approaches are being further weakened. Impacts materialize in the devaluing of offshoring, outsourcing, and just-in-time production tenets as their fundamental assumptions (e.g., reliable global supply networks) diminish. To mitigate possible impacts, focus on the identification of alternative manufacturing sources and transportation lanes.

Consumer goods disruptions

While the global economy is in the middle of a global chip shortage that has touched nearly every industry, the prognosis grows worse as the conflict in Eastern Europe persists—both Russian and Ukraine are rich in the resources needed to manufacture everyday goods. Businesses utilizing semiconductors, combustion engines, nitrogen fertilizers, and wheat stand to face the most severe repercussions.

As material shortages compound, manufacturers now have to evaluate the cost-benefit analysis of keeping up with rising costs and lowering supply against the possibility of removing barriers to increased production—as seen already in the auto industry.

Accelerated transition to renewable energy

From the onset of the conflict, energy and its increasing costs have been a central point of concern—Russia’s standing as a leading energy exporter has come into question due to sanctions and project delays, combined with the possibility of natural gas being used as a political weapon.

A worldwide reassessment of energy-sourcing policies by countries will occur as the fragility of energy dependence has become highlighted. From this, a natural conclusion is a hastened transition to renewable energy among EU members.

Prolonged economic instability

With economies worldwide experiencing inflation, fundamental changes to worldwide financial systems, and decreasing consumer confidence, a deep sense of foreboding is inescapable. Further exacerbating these issues is an impending migrant crisis—with potentially as many as 5 million people being displaced.

The cost of capital will rise, the velocity of money will slow, and markets will react with instability. As seen in Europe during the Syrian migrant crisis, political instability abounds in times of mass migration.

Agile, digital businesses are best-positioned to handle a scarcity of resources

Recommendations for increasing agility

Many unknowns still exist. The good news is that global brand owners have taken risk mitigation steps over the past 24 months that will positively impact their ability to weather additional uncertainty. But conditions are ever-changing, making responsiveness and agility key. Here are our recommendations:

Lean into technology-driven forecasting

Brand owners should specifically be investing in collaboration and planning technologies that harness algorithmically driven forecasts. The reason? To better position suppliers and plants to produce a more accurate view of what’s needed, when, and where to meet customer demand. A disparate application ecosystem and Microsoft Excel aren’t adequate planning tools—especially during times of uncertainty.

Manage—maybe not meet—customer expectations through suppliers and planning

On the supply chain execution front, brand owners will need to continuously monitor supplier capacity and inbound logistics visibility milestones to manage—not necessarily meet—customer expectations. In terms of supplier durability, seek alternative sources of supply wherever possible and continue providing updated demand signals to suppliers with six to 12 months of forecast shipments. Being able to index raw material price movements to finished goods pricing is also critical to maintaining profitability.

Prioritize resilience

Complete an examination of logistics functions and a thorough network analysis to ensure resilience. Examine the capabilities of your transportation network for flexibility to ensure viability as conditions change—and identify the flow of materials throughout your cash cycle to pinpoint vulnerabilities.