How the Russia-Ukraine conflict is impacting supply chains

13 July 2022 7 min. read

Following the impact of Covid-19, supply chains are once again being tested – this time by the war in Ukraine. The conflict has reinforced the imperative for organisations to build resilience into their supply chains; many are trying to reduce their dependency on Russia and East Europe for raw materials and are instead migrating towards more localised or regional sourcing strategies.

The immediate effect on the supply chain has been the sharp rise in the prices of commodities, including petrol and diesel, which has hit hard. Meanwhile, companies around the world are being forced to find alternative material and labour sources to keep up with demand.

As disruption continues to ripple across the globe, Ashray Lavsi, a Senior Manager at global procurement and operations consultancy Efficio, shares five key impacts on organisational supply chains.

Ashray Lavsi, Senior Manager, Efficio

1) Global commodity prices are increasing

As we have already witnessed, commodity prices have seen a colossal spike as a direct impact of supply disruptions and rapidly rising inflation. This comes after a time in which markets have already been impacted by Covid-19 and other existing supply chain challenges.

The Ukraine conflict is likely to have a continued inflationary impact on the costs of raw materials, energy, logistics, and digital services. Oil and gas prices, in particular, have already skyrocketed across the globe due to the high dependence on imports from Russia, the supplier of 40% of Europe’s gas.

According to recent reports, this continued rise in energy costs is having a negative impact on the eurozone economy, which has seen growth continue to slip. An indirect and lagged impact on resins and petrochemicals is also expected as the rising prices of upstream resources (crude oil and natural gas) drive up the cost of production, causing possible logistical disruption.

But energy isn’t the only industry to suffer from such price hikes. Key metals such as aluminium, nickel, platinum, and copper are all expected to be impacted – which will have a knock-on effect on costs across industries using these materials.

2) Organisations are looking for alternative sources of supply

This rapid price inflation is forcing companies across the globe to explore alternative sources – not just to find cheaper materials but also for surety of supply.

For example, Ukraine and Russia are collectively top exporters of corn and wheat, which means the supply of major grains will likely be impacted, increasing prices of bread and other goods.

Russia is also the world’s biggest exporter of all three major groups of fertilisers, again pushing up input costs. This could lead to a potential food crisis in major importing regions, including the Middle East and North Africa, if alternatives are not quickly found.

We also expect to witness further disruption in the supply of metals, plastics, and semiconductor chips, which will impact the production of medical devices. Russia is a key player in the mining of palladium (45%) and platinum (15%), and possible international trade sanctions by the EU and US on Russia are likely to disrupt exports of these metals.

As a result of such shortages, we foresee a shift to raw materials flowing from Asia and Africa instead. Some changes will be permanent, but they are unlikely to change in the short to medium term. Raw materials will be available in new geographies and markets under different conditions, with new suppliers and prices, and their availability may be limited.

Further reading: Finding opportunity in rising raw materials prices and inflation.

3) Labour shortages

In addition to sourcing alternative materials, businesses are also under pressure to find additional labour. Since the conflict began, there has been a restriction in labour supply in Eastern Europe which has again led to – you guessed it – increased cost.

International Chamber of Shipping (ICS) data notes that Russians account for 10.5% (198,123) of the global shipping workforce, with Ukraine providing 76,442 (or 4%). Many businesses are now exploring options in Africa and South America, especially for labour-intensive applications moving away from Eastern Europe.

This is particularly important for industries such as agriculture and farming, which rely on a large percentage of foreign seasonal workers on a short-term basis to harvest crops.

4) Production and importation disruption

Obviously, global supply and demand have both been massively impacted since 2020, leading to supply chain shortages. There has been a surging demand, particularly for consumer goods, in advanced economies, increasing the demand for goods from Asia. On the supply side, Chinese factory port closures and labour shortages in the ports of importing countries have created significant delays and few available ships.

Meanwhile, major Western ports have reported significant backlogs and stranded containers, in turn contributing to the shortage of containers. The war has disrupted all areas of logistics movement – including airlines, ocean freight, and rail freight – even further. We can also expect disruption of the last-mile sections of the supply chain – an area that was already deeply impacted by the pandemic and recent fuel and driver shortages.

To limit disturbance in this area, businesses will need to have greater transparency over planned transport, capacities, and relevant alternative routes. Creating strategic relationships and joining alliances will also be essential to ensuring capacities, should further hurdles emerge. In this time of constant change and volatility, businesses simply cannot afford to rely on outdated information or put all their eggs in one basket by giving all volumes to one freight forwarder.

5) Risk management is no longer optional

The above trends – cost, alternative sourcing, logistical disruption, and shortages in material and labour – all point to our fifth and final one – a greater focus on risk management. The current crisis has highlighted the need for organisations to improve the visibility of supply chains where risk is often hidden in sub-tier suppliers.

Questions such as “Who are our suppliers’ suppliers?” and “Where do our critical raw materials originate from?” may seem obvious, but this level of visibility and understanding of where potential risk could lie is extremely important for organisations to be able to respond and adapt to further disruption. Supply chain managers will be focused on building resilience in their operations, and that all begins with visibility and preparedness.

In fact, we will see organisations moving away from Just-In-Time (JIT) inventory management to Just-In-Case (JIC) inventory management. Regionalisation and in-country supply are also becoming more attractive options in terms of the safety, security, and the stability they afford.

Weathering the storm

The Russia-Ukraine conflict has escalated supply chain disruption and concerns for critical business services. While the current climate is unpredictable, businesses need to be proactive and consider how the situation may develop over time and what scenarios might arise.

Many organisations are currently lacking the visibility, planning maturity, governance, people, and real-time analytics to facilitate supply chain risk management and drive resilience while also balancing cost. Evaluation is therefore key. This includes assessing alternative sources, production changes, and sourcing strategies to diversify supply chain inputs.

Conducting a risk assessment of strategic suppliers to minimise supply chain disruption is also essential, as is a full assessment of labour and inventory levels for short- and long-term planning to buffer against potential future disruption. Additionally, be sure to track existing and anticipated sanctions to best assess their potential impact on your business.

Careful assessment and preparation will allow organisations to be proactive rather than reactive, in order to weather further disruption.